Explain that an at-the-money European call option on a given stock must cost more than an at-the-money European put option on that stock with the same maturity. The stock will pay no dividends until after the expiration data.
Added by Michael S.
Step 1
In other words, the option has no intrinsic value at the time of purchase. Step 2: Understand the difference between a call option and a put option A call option gives the holder the right, but not the obligation, to buy the underlying stock at the strike price Show more…
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Consider an American call option when the stock price is $18, the exercise price is $20, the time to maturity is 6 months, the volatility is 30% per annum, and the risk-free interest rate is 10% per annum. Two equal dividends are expected during the life of the option with ex-dividend dates at the end of 2 months and 5 months. Assume the dividends are 40 cents. Use Black's approximation to value the option. How high can the dividends be without the American option being worth more than the corresponding European option?
Sri K.
Akash M.
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