What is the price of a two-year european call option

Reference no: EM131538465

The stock of the Miami Tower Company (MTC) is currently worth $100. Over each of the next two years, the stock price will either move up to 115% of the beginning-of-year stock price or down to 90% of the beginning of year price. You do not know which one will happen, nor how likely these are. The risk-free interest rate is 3% per year. MTC will also pay a $2 per share dividend at the end of year 1. Assume that it is possible to observe the stock price at the end of year 1, exercise any option you might hold immediately (should you choose to do so), and still qualify for the dividend if exercise gives ownership of the underlying.

(a) What is the price of a two-year European Call Option with strike price $95, written on MTC stock?

(b) What is the price of a two-year American Call Option with strike price $95, written on MTC stock? For full credit, you must show whether early exercise is profitable in each state of the world.

(c) What is the price of a two-year American Put Option with strike price $95, written on MTC stock? For full credit, you must show whether early exercise is profitable in each state of the world.

(d) What is the price of a two-year American Put Option with strike price $105, written on MTC stock?

Reference no: EM131538465

Questions Cloud

List the headings of a process cost summary : List the headings of the three major sections of a process cost summary. Refer to Exhibit.

What themes emerge regarding your experiences : What themes emerge regarding your experiences as a helper and your experiences as a client? For instance you may discover theme of anger marks your experience

Explain the type of market in which your selected product : Explain the type of market in which your selected product will compete, along with an analysis of competitors and customers.

More offers bond with coupon rate of percent : Chocolate and More offers a bond with a coupon rate of percent, semiannual payments, and a yield to maturity of 7.73 percent.

What is the price of a two-year european call option : What is the price of a two-year European Call Option with strike price $95, written on MTC stock?

Retained earnings to be used in capital budgeting analysis : The Yo-Yo Corporation tries to determine the appropriate cost for retained earnings to be used in capital budgeting analysis.

Determine if the program to reduce water usage is successful : Anheuser-Busch InBev is attempting to reduce its water usage. How could a company manager use a process cost summary.

What is the opportunity cost of typical college education : What's the opportunity cost of typical college education? What's your opportunity cost? What's your opinion about staying or dropping out from the college?

How many of its shares should firm offer in exchange : How many of its shares should Firm A offer in exchange for all of Firm B's share if it want its acquisition cost to be $12,000?

User Account

All Pages