Assume K = $40, = 30%, r = 0.08, T = 0.5, and the stock is

Question:

Assume K = $40, σ = 30%, r = 0.08, T = 0.5, and the stock is to pay a single dividend of $2 tomorrow, with no dividends thereafter.

a. Suppose S = $50. What is the price of a European call option? Consider an otherwise identical American call. What is its price?

b. Repeat, only suppose S = $60.

c. Under what circumstance would you not exercise the option today?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...