QUESTION 5 Consider a 3-month call option on a dividend paying stock when: the current stock price is $9.00 the exercise price is $6.00 the volatility is 20% p.a. the risk-free rate of interest (continuous compounding) is 10% p.a. the time to expiry is 3 months the stock is expected to pay a dividend of $1.25 in 1.25 (one and one-quarter) months time. Use the Binomial Option Pricing model with the life of the option divided into three 1-month periods. Required (a) What is the value of the call option if it is an American call option? (b) What is the value of the call option if it is a European option? (4 marks) (2 marks)