Question: You have been tasked with producing a report on the pricing of potential option investments being considered by your investment fund employer. The asset underlying

You have been tasked with producing a report on the pricing of potential option investments being considered by your investment fund employer. The asset underlying the options is a stock that has a current price of $50 and is expected to move up or down 8% over each upcoming 3-month period. The risk-free rate is 2% (APR with quarterly compounding).

(a) What is the price of an American put option with strike price of $55 and 1-year to expiry? What is the price of an European put option with a strike price of $55 and 1-year to expiry? Explain any differences between your answers.

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