1) A share is trading at 250 pence in the market. Its volatility is 40 per cent per year and the risk-free continuously compounded interest rate is 3 per cent per year. The share will pay a dividend of 25 pence in 2 months time. Using the Black-Scholes-Merton option-pricing model), find the value of a three-month European-style call option on the share with a strike price of 260?

2) Explain why, and under what conditions, an option holder might wish to exercise an option before its final maturity.

3) Using Blacks pseudo-adjustment for American-style calls, find the price of the corresponding American-style call given in Part 1 above. How much more valuable is the American-style optionif at alland what does it tell us about the optimal exercise of the option?