Solve the questions in the attachment

(i) What is the difference between a "European" and an "American" option? [1] (ii) Explain why it is never optimal for the holder of an American call option on a non-dividend-paying share to exercise the option before the expiry date if there is an active trading market for the option. [2] (iii) Explain why, even if there is no active trading market, it is never optimal for the holder of an American call option on a non-dividend-paying share, who does not intend to sell the underlying stock during the life of the option, to exercise the option before the expiry date. [31A call option on a stock that does not pay dividends has the following parameter values (in the usual notation): S = 240, K =250, 7 =0.5, r = 0.06, 6 = 0.2 The graphs below show the theoretical price of this option at time / =0 when each of the parameters S, K, 7 and / is varied without changing the values of the other parameters. Identify which parameter has been plotted along the x-axis of each graph. [4] Graph 1 Graph 2 40 30 30 20 20 10 10 Graph 3 Graph 4 25 25 20 20 15 15 10 10