Show that Black-Scholes call option hedge ratios also increase as the stock price increases. Consider a 1-year option with exercise price $50, on a stock with annual standard deviation 20%. The T-bill rate is 8% per year. Find N(d1) for stock prices $45, $50, and $55.
Calculate the value of a call option on the stock in the previous problem with an exercise price of 110. Verify that the put-call parity theorem is satisfied by your answers to problems 5 and 6. (Do not use continuous compounding to calculate the present value of X in this example because we are using a two-state model here, not a continuous-time Black-Scholes model.)