Continuously compounded risk free rate of interest

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An American call option on a stock has a time to maturity of 4 months and an exercise price of $60.

The stock price is $60, and the stock volatility is 20%.

A dividend of $0.75 per share is expected to be paid in 2 months, which may be considered as an ex-dividend date as well.

The continuously compounded risk free rate of interest is 4% per annum.

Which of the following statements is true?

a. It is not optimal to exercise the option early before the ex-dividend date

b. It is optimal to exercise the option early after the ex-dividend date

c. It is optimal to exercise the option early before the ex-dividend date

Reference no: EM133114183

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