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A price on a non-dividend paying stock is currently £50. Over each of the next two...

A price on a non-dividend paying stock is currently £50. Over each of the next two six-month periods the stock is expected to go up by 5% or down by 10%. The risk- free interest rate is 3% per annum with continuous compounding.
(a) What is the value of a one-year European call option with a strike price of £48?

(b) What is the value of a one-year American call option with a strike price of £48?
(c) Discuss how your answer to (b) would change if the stock instead actually did pay cash dividend

Formula, calculation, result, interpretation

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A price on a non-dividend paying stock is currently £50. Over each of the next two six-month periods the stock is expected to go up by 5% or down by 10%.

ekkarill92 answered 2 years ago
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