1. The underlying stock for a European exchange option has S = $27.15, div = 2.0%, and sigma= 0.18. The strike stock has S = $30.00, div = 0.0%, and sigma = 0.22. The two stocks have a correlation coefficient of 0.73. If the exchange option expires in 2 years, what is the price of the call using a Black-Scholes approach? (sigma as the volatility)
A) $0.88
B) $0.98
C) $1.09
D) $1.19
2. Assume S = $31.75, div = 0, r = 0.03, and sigma (volatility) = 0.20, and 90 days until the expiration of a standard call option. A put on call compound option with an exercise price of $2.00 has 180 days until expiration. What is the premium of the put on call option?
A) $0.42
B) $0.48
C) $0.85
D) $1.11