Question: Assume K = $40, = 30%, r = 0.08, T = 0.5, and the stock is to pay a single dividend of $2 tomorrow,

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?

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a To be very exact we would have to discount tomorrows dividend However PV Div 2 exp008 1360 19996 2 ... View full answer

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