Describe the black-scholes option pricing formula, Corporate Finance

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Question:

a) Write down and describe the Black-Scholes option pricing formula with respect to the various determinants of option prices.

b) Determine the price of a European call option on a non-dividend paying stock given that the stock price is $32, the strike price is $30 and the risk-free rate is 10% per annum, the volatility is 20% per annum and the time to maturity is four months?

c) Consider equal premiums, consider the payoff profiles for buying a put and selling a call option on the Yen. Both options are at the money.

i) Show the payoff profile of the options and the combination on the same diagram.

ii) What is the name provided to this combination and how might it be used for arbitrage?


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