What should the market price of the put option be

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Reference no: EM131237890

1. Explain carefully why a distribution with a heavier left tail and less heavy right tail than the lognormal distribution gives rise to a downward sloping volatility smile.

2. The market price of a European call is $3.00 and its price given by Black-Scholes- Merton model with a volatility of 30% is $3.50. The price given by this Black-Scholes- Merton model for a European put option with the same strike price and time to maturityis $1.00.

What should the market price of the put option be? Explain the reasons for your answer.

Reference no: EM131237890

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