Suppose that we have a firm whose current value is $1,000 and that (given a multiplicative stochastic

Question:

Suppose that we have a firm whose current value is $1,000 and that (given a multiplicative stochastic process) its value could go up by 12.75% or down by 11.31%-a standard deviation of 12% per annum. The risk-free rate is 8%. The equity of this firm is subordinate to debt that has a of $800 maturing in three years and that pays no coupons. What is the value of an American call option written on the equity if its exercise price is $400 and it matures in three years?
Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...