The price of a non-dividend-paying asset is currently $400 and the risk-free interest rate

is 6% per annum with continuous compounding. The volatility is 25% per annum. A

European option on the underlying asset has the remaining time to maturity equal to

two years.

REQUIRED

1. Using the continuous-time formula of Black-Scholes and Merton compute the value

of a European call option with a strike price equal to $300.

2.

Explain briey in words (up to approximately 10 lines of text) the necessary steps

of the computation and comment on how to achieve good numerical accuracy of

the nal result