Suppose S = $40, K = $40, σ = 0.30, r = 0.08, and δ = 0.
a. What is the price of a standard European call with 2 years to expiration?
b. Suppose you have a compound call giving you the right to pay $2 1 year from today to buy the option in part (a). For what stock prices in 1 year will you exercise this option?
c. What is the price of this compound call?
d. What is the price of a compound option giving you the right to sell the option in part (a) in 1 year for $2?