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An investor is interested in the following call option. Current stock price...

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Finance

An investor is interested in the following call option.

  • Current stock price is $8.
  • At each time period, the stock price can increase or decrease by 10%, respectively.
  • The strike price is $7.

Assuming that the annual interest/discount rate r is 10%, compute the European call option value using a binomial tree model with two time periods (i.e., each period for six months).

Compute the European call option value using the Black-Scholes formula with reasonable assumptions.

For the aforementioned call option (i.e., based on the same model and assumptions), if only the interest/discount rate r can be changed (i.e., other parameters remain unchanged), can the American call option have a different price from the European call option? In other words, can the American call option have a higher or lower price at certain values of r. If it is not possible, provide a proof or explanation.

European call option value based on the binomial tree model =

European call option value based on the Black-Sholes formula =

Discussion/explanation on the American call option price:

Answer & Explanation Solved by verified expert
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