The price of Moria Mining stock is $100. During each of the next two six-month periods the price may either rise by 25% or fall by 20% (equivalent to a standard deviation of 31.5% a year). At month 6 the company will pay a dividend of $20. The interest rate is 10%

per six-month period. What is the value of a one-year American call option with an exercise price of $80? Now recalculate the option value, assuming that the dividend is equal to 20%

of the with-dividend stock price.

AppendixLO1