2. (a) The stock of Huesca Hardware trades for €l142 per share. The share price bas price volatility of 25%. Huesca Hardware has no plans to pay dividends over the next six months. The risk-free rate...

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Extracted text: 2. (a) The stock of Huesca Hardware trades for €l142 per share. The share price bas price volatility of 25%. Huesca Hardware has no plans to pay dividends over the next six months. The risk-free rate is 5% per annum with continuous compounding. Use the Black-Scholes option pricing model to compute: the price of a 6-month European call option written on the stock with a strike price of €125. (i) the price of a 6-month Europcan put option written on the stock with a strike price of e150. (b) Use put-call parity to compute the price of a 6-month European put option written on the stock with a strike price of €125. i) the price of a 6-month European call option written on the stock with a strike price of €150. (c) Pierre expects the price of Huesca Hardware's stock to fall over the next six months. Use the opticns from parts a and b to devise a trading strategy to reflect his expectations. For this strategy: (i) compute the initial (t-0) cashflows. compute the payoffs at maturity. (iii) (ii) compute the upper and lower profit bounds. draw the profit diagram. (iv)