QUESTION 6 (5 points) There exist call and put options on one share of Options'R'Real Inc. (ORR). Each option is EUROPEAN, expires exactly one year from today and has an exercise price of $45 per share. There are no transaction costs and no taxes. Suppose that the current riskless borrowing and lending interest rate from today until the option's expiration date remains 4.65%, and that the current share price of ORR is $20. Moreover, the likelihood that the stock price will rise to $45 (the exercise price) or higher is zero. ORR will not pay dividends. a) What is the call price? (Hint: How much would you pay for a call option that you will never exercise?) (1 pt.) b) What are the equilibrium price, intrinsic value and time value of the European put option? (2 points) c) Suppose that the put options are American options. Will the equilibrium price of the American put be equal to, or higher than that of the European put? EXPLAIN. (2 points) QUESTION 6 (5 points) There exist call and put options on one share of Options'R'Real Inc. (ORR). Each option is EUROPEAN, expires exactly one year from today and has an exercise price of $45 per share. There are no transaction costs and no taxes. Suppose that the current riskless borrowing and lending interest rate from today until the option's expiration date remains 4.65%, and that the current share price of ORR is $20. Moreover, the likelihood that the stock price will rise to $45 (the exercise price) or higher is zero. ORR will not pay dividends. a) What is the call price? (Hint: How much would you pay for a call option that you will never exercise?) (1 pt.) b) What are the equilibrium price, intrinsic value and time value of the European put option? (2 points) c) Suppose that the put options are American options. Will the equilibrium price of the American put be equal to, or higher than that of the European put? EXPLAIN. (2 points)