You are working for an investment firm in the City of London and have been asked to perform some analysis of the European-style call options of a company called Elevation Matters Plc (EM).

The most recent closing share price for EM was 38. The risk-free rate is 3%. The time to expiry for the options is one year. The volatility (standard deviation) of EMs shares is 25% and the company has decided not to pay any dividends this year.

On the basis of these forecasts, you been asked to estimate the option premiums for a strike price of 47. Once the relevant premium has been estimated, your firm are planning to promote and sell the financial products to all prospective clients and to use this analysis as a tool for explaining share options to junior members of staff. Required:

1. Using the Black-Scholes option pricing model, calculate the call premium price for the shares of EM State four limitations of the model. Note: that d1and d2 should be estimated to two decimal places

2. Calculate, using the call-put parity theory, the put premium at the strike prices for the shares of EM.

3.Explain another method of calculating the premium for a share option using any numerical example you think would assist your explanation.

Please show all workings.

This is all that relates to part 3. Premium calculation other than using Black Scholes or call-put parity should be described.