The current price of Gringotts Bank Corporation is $50. The price will increase by 40% or...

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The current price of Gringotts Bank Corporation is $50. Theprice will increase by 40% or fall by 35% during each of the nexttwo years. The company will pay a $9 dividend at the end of thefirst year if the stock price has risen, and will pay a $4 dividendif the price has fallen. It will not pay any dividends at the endof second year. The annualized, continuously compounded interestrate is 5%. What is the value of a 2-year European call option witha $45 strike price? What if it’s an American call option?

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American call option is the type of option contract that can be exercised at any time on or before maturity whereas european option can be exercised only on maturity Here we need to calculate value of 2year call option See Answer

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The current price of Gringotts Bank Corporation is $50. Theprice will increase by 40% or fall by 35% during each of the nexttwo years. The company will pay a $9 dividend at the end of thefirst year if the stock price has risen, and will pay a $4 dividendif the price has fallen. It will not pay any dividends at the endof second year. The annualized, continuously compounded interestrate is 5%. What is the value of a 2-year European call option witha $45 strike price? What if it’s an American call option?