Compute the theoretical value of the put

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The current stock price is at RM8 with a volatility of 0.35. You buy a put option with the exercise price of RM7.5 and the time to expiration is 3 months from now. The risk-free interest rate is 2%. Answer the following questions.

(i) Use Black-Scholes option pricing model to compute the theoretical value of the put.

(ii) If the put price is RM4.5, is it under-or overpriced?

(iii) Discuss the two most critical assumptions made under Black Scholes Option Pricing model.

Reference no: EM133060910

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