Vanguard plc is a trading company that has unexpectedly benefited from a lucrative contract in India. This has resulted in a much higher level of cash in the firm than usual. The directors at Vanguard, rather than risk squandering the windfall, have decided to pay out a special dividend to shareholders. This has just been announced on the stock market. I hold options on Vanguard stock. The stock price is currently 1520p and the exercise price i bought at was 1400p. The special dividend is to be 145p and the stock will go ex-dividend in 40 days. The option expires in 90 days. The risk-free rate of interest is 3.5% and the volatility of the underlying stock is 22.5%.

(a) What is the price of the call option

(b) What would be the price of a put option on the stock.

(c) Identify the five Greeks in option pricing, explain their function, and explain what

it means if they have high or low values with regards to calls and puts. Use

diagrams to illustrate the answer.