Explain why the two implied volatilities are different

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A stock price is $40. A 6-month European call option on the stock with a strike price of $30 has an implied volatility of 35%. A 6-month European call option on the stock with a strike price of $50 has an implied volatility of 28%. The 6-month risk-free rate is 5% and no dividends are expected.

Explain why the two implied volatilities are different. Use DerivaGem to calculate the prices of the two options.

Use put-call parity to calculate the prices of 6-month European put options with strike prices of $30 and $50. Use DerivaGem to calculate the implied volatilities of these two put options.

Reference no: EM131237848

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