For a stock, you are given that: i) The current stock price is 45 ii) The stock is going to pay a dividend of 1.2 after 3 months. This is the only dividend to be paid in the coming 6 months. iii) A 6-month 42-strike European put option on the stock has a premium of 0.36 iv) The continuosly compounded risk-free interest rate is 4% Consider a 6-month 42-strike American call option on the stock. Is it optimal to excerise that call option now?
For a stock, you are given that: i) The current stock price is 45 ii) The stock is going to pay a dividend of 1.2 after 3 months. This is the only dividend to be paid in the coming 6 months. iii) A 6-month 42-strike European put option on the stock has a premium of 0.36 iv) The continuosly compounded risk-free interest rate is 4% Consider a 6-month 42-strike American call option on the stock. Is it optimal to excerise that call option now?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![For a stock, you are given that:
i) The current stock price is 45
ii) The stock is going to pay a dividend of 1.2 after 3 months. This is the only dividend to be paid in the coming 6 months.
iii) A 6-month 42-strike European put option on the stock has a premium of 0.36
iv) The continuosly compounded risk-free interest rate is 4%
Consider a 6-month 42-strike American call option on the stock. Is it optimal to excerise that call option now?
Possible Answers
A Yes, because the sum of implicit put protection and interest on strike is greater than the present value of dividends
B No, because the sum of implicit put protection and interest on strike is greater than the present value of dividends
C Yes, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends
D No, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends
E Cannot be determined](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F52597d63-6059-4465-8a8e-ce024ed62253%2F1a8a10c4-f23f-43d9-8e6e-b6c18f9967db%2Fjmiipof_processed.jpeg&w=3840&q=75)
Transcribed Image Text:For a stock, you are given that:
i) The current stock price is 45
ii) The stock is going to pay a dividend of 1.2 after 3 months. This is the only dividend to be paid in the coming 6 months.
iii) A 6-month 42-strike European put option on the stock has a premium of 0.36
iv) The continuosly compounded risk-free interest rate is 4%
Consider a 6-month 42-strike American call option on the stock. Is it optimal to excerise that call option now?
Possible Answers
A Yes, because the sum of implicit put protection and interest on strike is greater than the present value of dividends
B No, because the sum of implicit put protection and interest on strike is greater than the present value of dividends
C Yes, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends
D No, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends
E Cannot be determined
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