Suppose the current price of a non-dividend-paying stock is $200. The continuously com- pounded riskfree rate...

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Suppose the current price of a non-dividend-paying stock is $200. The continuously com- pounded riskfree rate is 10%. Consider the following two options: Option 1: an American call option on the stock with strike $150 and 1-year maturity. • Option 2: an European put option on the stock with strike $150 and 6-month maturity. Which of the following combinations can be reasonable prices for these two options today? Option 2: $30. (A) Option 1: $60 (B) Option 1: $50 Option 2: -$10. (C) Option 1: $40 Option 2: $20. (D) Option 1: $150 Option 2: $50. Suppose the current price of a non-dividend-paying stock is $200. The continuously com- pounded riskfree rate is 10%. Consider the following two options: Option 1: an American call option on the stock with strike $150 and 1-year maturity. • Option 2: an European put option on the stock with strike $150 and 6-month maturity. Which of the following combinations can be reasonable prices for these two options today? Option 2: $30. (A) Option 1: $60 (B) Option 1: $50 Option 2: -$10. (C) Option 1: $40 Option 2: $20. (D) Option 1: $150 Option 2: $50.

Answer rating: 100% (QA)

Solution The value of an option can be calculated using the BlackScholes model which takes into acco... View the full answer