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Consider a 6-month American call with a strike price of $93 on a discrete paying stock with current price $100. Suppose that there are 2
Consider a 6-month American call with a strike price of $93 on a discrete paying stock with current price $100. Suppose that there are 2 time steps, and in each 3-month time step the stock price either moves up by 10% or moves down by 10%. $2 dividend will be paid after movement of stock price in 3 month. The continuously risk-free interest rate is 3%. (a) Fill in the binomial tree model and find the premium of the call option. (b) By comparing dividend D and ["value of a chance of buying stock at a price below K at T=0.5 " at t=0.25 together with "value of interest of strike price within second period" at t=0.251, explain why the call option should be exercised at B but not at C
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