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Consider an option on a nondividend paying stock when the stock price is $25, the exercise price is $29, the risk free interest rate is 5% per annum, the volatility is 25% per annum, and time to maturity is four months.

a. What is the price of the option if it is a European call? What is the price of the option if it is a European put?

b. What is the price of the option if it is an American call?

c. How would the result of a) change if a dividend of $2 is expected in two months? How would the result of a) change if a dividend of $2 is expected in six months?

Basic Finance, Finance

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