A nondividend-paying stock has a current price of $30 and a volatility of 20 percent per year.

Question:

A nondividend-paying stock has a current price of

$30 and a volatility of 20 percent per year.

(a) Use the Black-Scholes equation to value a European call option on the stock above with a strike price of $28 and time to maturity of three months.

(b) Without performing calculations, state whether this price would be higher if the call were American. Why?

(c) Suppose the stock pays dividends. Would otherwise identical American and European options likely have the same value? Why?

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