Question 4 Nobitha Manja Berhad (NMB) stock is currently selling at RM20. The exercise price is RM18. The stock option has 120 days to expiration. The annual risk-free interest rate is 7%. The variance has been estimated to be 25% per annum. (Assume: 365 days in a year) From the above information you are required to answer the following questions:
a. Calculate the value of the call option based on Black-Scholes model.
b. Estimate the corresponding value of put option.
c. Briefly explain the effect on the value of the call and put option if:
i. the current stock price decreases;
ii. the standard deviation of return on the stock increases
iii. the risk-free rate decreases
iv. the time to expiration increases;