Stock price is currently 50 GBP. The price can increase by a factor of 1.10, or fall by a factor of 0.90. The stock pays no dividends and the yearly discrete compounding interest rate is 0.05. Consider American put and call options on this stock with a strike price of 50 GBP, and with two years to maturity and one year step length. a) What will be the price of this American call option at t = 0? Will it be different from the price of a European call option? b) What will be the price of this American put option with the same strike price? c) Does the put call parity hold?

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answer Discrete compounding refers to the method by which interest is calculated and added to the pr... View the full answer