The strike price of an American call option on a stock is 29. The stock currently sells for 30 and in one year will be worth either 33 or 27.

(a) Calculate the value of the call option with a risk-free rate of 3.5% p.a.

(b) Repeat your calculations from a), but with a risk-free rate of (3.5)% p.a.

(c) Provide the intuition for the difference in your results from a) and b)

Answer rating: 100% (QA)

To solve this question we need to understand the concept of an American call option An American call option provides the holder the right to buy an as... View the full answer