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The continuously compounded annual risk-free interest rate

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The continuously compounded annual risk-free interest rate is 2% and there are notransaction costs.1. What should be the price of the call option? (2 marks)2. Assume that the call option on Apple with strike price $90 and maturity in one year iscurrently trading at $17. You immediately tell your broker that you found a differentprice in part (1), but he replies that you must be wrong: markets should be efficientand the price you computed in point (1) is useless. The formula you used to price thecall option probably works in theory, but in practice the market evidently knowssomething that you don't. For example, it could expect the stock price to increase alot. Do you agree with him or not? Support your answer with computations. (4 marks)3. Assume that you need to pay a trading fee of 8 cents per option or per stock youbuy/sell. Would your answer to part (2) change? 

Reference no: EM13961575

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The continuously compounded annual risk-free interest rate : The continuously compounded annual risk-free interest rate is 2% and there are notransaction costs.1. What should be the price of the call option? (2 marks)2. Assume that the call option on Apple with strike price $90 and maturity in one year iscurre..
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