What is the value of the option if it is american option

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Reference no: EM131344188

A stock is presently selling for $100. over each of the next two months, the stock will either increase of decrease in value by 9%, and will not pay any dividends. The risk-free rate is 2% per month. Consider a call option on the stock with an exercise price of $90 and a maturity date two months hence: (a) What is the value of the option if it is an American option? What is the value if it is a European option? (b) What position in stocks and bonds at time zero will have the same value as the call at t = 1. (c) If the expected return on the stock is 4% per month, what must the expected return on the call be over the first month? What will the expected return on the call be in the second month given that the stock has fallen to $91?

Reference no: EM131344188

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