Question: Question #3 (10 marks) Q3-Part I (6 marks) American call option American put option Time to maturity 1 Volatility 1 Dividends T (1) If time

Question #3 (10 marks) Q3-Part I (6 marks) American call option

Question #3 (10 marks) Q3-Part I (6 marks) American call option American put option Time to maturity 1 Volatility 1 Dividends T (1) If time to maturity increases, what happens to the prices of American call and put options respectively? Put increase, decrease", or "no change" in the corresponding cells in the above table, and explain your answers. (2 marks) (2) If volatility increases, what happens to the prices of American call and put options respectively? Put "increase", "decrease", or "no change in the corresponding cells in the above table, and explain your answers. (2 marks) (3) If dividends increase, what happens to the prices of American call and put options respectively? Put increase, decrease, or no change in the corresponding cells in the above table, and explain your answers. (2 marks) Q3-Part II (4 marks) (1) The upper bound for American put option price is P SK. Discuss the arbitrage opportunity if P > K. (2 marks) (2) The upper bound for European put option price is p s Kert. Discuss the arbitrage opportunity if p > Ke=T. (2 marks)

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