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4. (i) An American call on a non-dividend paying stock has an exercise price of 40. The price of the stock is 50; the option
4. (i) An American call on a non-dividend paying stock has an exercise price of 40. The price of the stock is 50; the option expires in three months. Two months later the stock price is 170. The holder of the call believes that the stock is overvalued and is certain to fall sharply in the next month. Explain why exercise of the option doesnt pay.
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