Suppose that a non-dividend paying stock is trading at $80 and the risk-free rate is 4.0%...

 

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Suppose that a non-dividend paying stock is trading at $80 and the risk-free rate is 4.0% (continuous compounding). Consider two American call options with two-months to expiration - one with a strike price of $100 and another with a strike price of $60. The value of the $100 European call option is $0.50, and the value of the $60 European call option is $20.75. There also exist corresponding American put options. a. Should the $60 American call option be exercised today? What about the $100 American call option? b. Should the $60 American put option be exercised today? What about the $100 American put option? Suppose that a non-dividend paying stock is trading at $80 and the risk-free rate is 4.0% (continuous compounding). Consider two American call options with two-months to expiration - one with a strike price of $100 and another with a strike price of $60. The value of the $100 European call option is $0.50, and the value of the $60 European call option is $20.75. There also exist corresponding American put options. a. Should the $60 American call option be exercised today? What about the $100 American call option? b. Should the $60 American put option be exercised today? What about the $100 American put option?

Answer rating: 100% (QA)

a The 60 American call option should not be exercised t... View the full answer