Calculate the european-style call option value

Assignment Help Portfolio Management

Reference no: EM13923524

Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and a European-style option with the same strike price, expiration, and underlying stock. Franklin believes that the European-style option will have a higher premium than the American-style option.

a. Critique Franklin's belief that the European-style option will have a higher premium. Franklin is asked to value a one-year European-style call option for Abaco Ltd. common stock, which last traded at $43.00. He has collected the following information:

Closing stock price	$43.00
Call and put option exercise price	$45.00
One-year put option price	$ 4.00
One-year Treasury bill rate	5.50%
Time to expiration	One year

b. Calculate, using put-call parity and the information provided, the European-style call option value.

c. State the effect, if any, of each of the following three variables on the value of a call option: (1) an increase in short-term interest rate, (2) an increase in stock price volatility, and (3) a decrease in time to option expiration.

Reference no: EM13923524

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