Question
4) Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the continuously compounded risk-free interest
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4) Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the continuously compounded risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. Use the Black-Scholes-Merton formula. a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What is the price of the option if it is a European put? d. Verify that put-call parity holds.
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