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Consider an American call option with 1 year to maturity and strike price of $50. The Risk-free rate is 5% per annum. The stock is
Consider an American call option with 1 year to maturity and strike price of $50. The Risk-free rate is 5% per annum. The stock is non-dividend paying, currently trading at $45, and has per annum volatility of 25%. State the absolute difference between the European Black- Scholes call option price and the American binomial price assuming:
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1 time step
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5 time steps
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10 time steps
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25 time steps
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50 time steps
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100 time steps
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Does this agree with the intuition that it is never optimal to exercise an American
call option on a non-dividend paying stock early?
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