Question: QUESTION 4 a) Why will an American call option on a stock that pays no dividend not be exercised before maturity? (6 Marks) b) Consider

QUESTION 4 a) Why will an American call option on a

stock that pays no dividend not be exercised before maturity? (6 Marks)

QUESTION 4 a) Why will an American call option on a stock that pays no dividend not be exercised before maturity? (6 Marks) b) Consider a European call option written on a stock that is now worth so = 100 with maturity T = 2 and a strike of r = 110. Suppose the risk-free interest rate is r = 0.1 and that a European put option written on the same underlying, with the same maturity (T = 2) and the same strike (x = 110), costs po = 30. What is the price of the call option? (8 Marks) c) Which one costs more: A European call option or an American call option (when they have the same maturity and the same strike price)? (Explain your answer.) (5 Marks) (Total 19 marks)

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