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Suppose a European call option has an exercise price of $100 and the underlying asset has a price of $100. The option expires in 1 year and the continuously compounded interest rate is 6%. Assume the underlying asset does not pay dividends.
(a) What is the intrinsic value of this option?
(b) What will the option be worth on expiration if the stock price in 1 year is $110? What if the stock price is $90?
(c) What is the lower bound on the price of this option today?
(d) Assume that the value of the call is $10. What is the value of a European put option with the same exercise price?
(e) Is the value of the American call option any different from the European call option? Why or why not?
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