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There are two European options written on the non-dividend paying common stock of Lion Ltd. One of them is a call option and the other
There are two European options written on the non-dividend paying common stock of Lion Ltd. One of them is a call option and the other one is a put option. Exercise prices of both options are $49 and they both have 199 days until maturity. Treasuring bills that matures in one year yields a continuously compounded interest rate of 7% per year. Currently, stock of Lion Ltd. is trading at $50 and it has an annual variance of 0.09 . Assume that there are 365 days in a year. a) Use Black and Scholes Option Pricing Model to calculate the price of the call option. (8 marks) b) Use Put-Call parity to find the implied price of the put option with the same maturity and exercise price on the same stock. (5 marks) c) Define the three forms of market efficiency (6 marks) d) During a trading day, Lion Ltd announces that it has lost a contract for a large mobile device project. Prior to the news, it was commonly believed to have secured. If the market is efficient, how should the stock price of the Lion Ltd react to this information if no additional information is released? (6 marks)
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