1. (a) A European call option and a European put option written on the same...
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1. (a) A European call option and a European put option written on the same underlying stock selling at $4 having the same exercise price and maturity are selling at $0.2 and $0.1 respectively. If the force of interest (continuous compound rate) is 5%, find the common exercise price given there are 6 months remaining to maturity. (b) Consider another European call option written on the same stock with the same maturity, but a exercise price of K* = K + 0.5, where K is the exercise price ob- tained in (a). Show that 0 5 C($(t),t; K, T) C($(t), t; K*,T)
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