Option Valuation:

In this question, you need to price options with various approaches. You will consider puts and calls on a share. Please read following instructions carefully:

• Spot Price = $26
• Strike Price = $28

Based on this spot price and this strike price as well as the fact that the risk-free interest rate is 6% per annum with continuous compounding, please undertake option valuations and answer related questions according to following instructions:

Black-Scholes-Merton model:

Using the information given above regarding the spot and strike price, risk-free rate of return and the fact that the volatility of the share price is 18%, answer following questions:

1. What is the price of an eight-month European call? [1 mark]
2. What is the price of an eight-month American call? [1 mark]
3. What is the price of an eight-month European put? [1 mark]
4. How would your result from c. change if a dividend of $1 is expected in three months? How would your result from c. change if a dividend of $1 is expected in ten months? [2 marks]

Note for calculations with the BSM model: Keep four decimal points for d1 and d2. Use the Table for N(x) with interpolation in calculating N(d1) and N(d2).