# Question: Assume K 40 30 r 0 08

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?

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?

## Relevant Questions

Suppose you sell a 45-strike call with 91 days to expiration. What is delta? If the option is on 100 shares, what investment is required for a delta-hedged portfolio? What is your overnight profit if the stock tomorrow is ...Consider a put for which T = 0.5 and K = $45. Compute the Greeks and verify that equation (13.9) is zero. Repeat the previous problem, except that instead of hedging volatility risk, you wish to hedge interest rate risk, i.e., to rho-hedge. In addition to delta-, gamma-, and rhohedging, can you delta-gamma-rho-vega hedge? In ...Examine the prices of up-and-out puts with strikes of $0.9 and $1.0 in Table 14.3. With barriers of $1 and $1.05, the 0.90-strike up-and-outs appear to have the same premium as the ordinary put. However, with a strike of 1.0 ...XYZ wants to hedge against depreciations of the euro and is also concerned about the price of oil, which is a significant component of XYZ's costs. However, there is a positive correlation between the euro and the price of ...Post your question