1. An analyst has calculated the value of a two-year European call option to be $0.80. The strike price of the option is 100.00, and the underlying asset is a 7% annual coupon bond with three years to maturity. The two-period binomial tree for the European option is below:

T0: Interest Rate = 3.00%, Bond price = $106.00, Option value = $0.80

T1 up: Interest Rate = 5.99%, Bond price = $100.57, Option value = $0.29

T2 up up= Interest Rate = 8.56%, Bond price = $98.56, Option value = $0.00

T1 down= Interest rate = 4.44%, Bond price = $103.80, Option value = $1.35

T2 down up (or up down) = Interest rate = 6.35%, Bond price = $100.62, Option value = $0.62

T2 down down = Interest rate = 4.70%, Bond price = $102.20, Option value = $2.20

The value of the comparable 2-year American call option (exercisable after 1 year) with a strike price of 100.00 is closest to:

1. $1.56
2. $2.12
3. $3.80