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Consider an option on a non-dividend paying stock when the stock price is $67, the exercise...

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Finance

Consider an option on a non-dividend paying stock when the stockprice is $67, the exercise price is $61, the risk-free rate is0.5%, the market volatility is 30% and the time to maturity is 6months. Using the Black-Scholes Model

(i) Compute the price of the option if it is a EuropeanCall.

(ii) Compute the price of the option if it is an AmericanCall.

(iii) Compute the price of the option if it is a EuropeanPut.

(iv) Assuming two dividend payments $1.75 and $2.75, two monthsand five months from now, compute the price of the option if it isa European Call.

(v) Refer to the dividend information provided in (iv) above.Compute the price of the option if it is an American Call. Providea graphical illustration to demonstrate how the price of thisAmerican Call and the payoff from the same change with respect tochanges in the stock price.

Answer & Explanation Solved by verified expert
3.8 Ratings (684 Votes)
Solutioniii In case of Call Option of a non dividend paying stock thePrice of the American Call option is the same as that of    See Answer
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