1. What is the price of a European call and put if the price of the underlying common stock is Kshs. 20, the exercise price is Kshs.20, the risk free rate is 8%, the variance of the return of the underlying stock is .36 (that is = .6) and the option expires six month from now.

Suppose that the government passes a usury law that prohibits lending at more than 5% interest but normal market rates are much higher due to inflation. You have a customer a Mr. Olendo who wants to borrow at 20% and can put up his Kshs. 10,000,000, store as collateral. Rather than refusing his request you decide to create a five-year contract with the following terms: you hold title to the store and receive the right to sell him the store for Kshs. X at the end of five years. If you decide to sell he must buy. In return you give him Kshs. 8,000,000 in cash (the amount he wants to borrow) and the right to buy the store from you at Kshs. X at the end of five years. How can this contract provide you with a 20% annual rate of return on the Kshs. 8,000,000?