The current price of a stock is $50.Every month,the stock price will rise by a factor of 1.2 or fall by a factor of 0.8;and a $1 risk-free investment will be worth $1.03.Dividends are paid as a proportion of the stock price.Which of the following $51-strike,six-month options has the highest value?
A)An American put when the stock pays no dividends.
B)A European put when the stock pays dividends at proportion 0.01 of the stock price.
C)An American call when the stock pays no dividends.
D)A European call when the stock pays dividends at proportion 0.01 of the stock price.

Question

Quizplus · Accepted Answer

Using the same function as the previous question,we price up all four options in order:
> print(OptionValue2(50,51,1.2,0.8,1.03,-1,1,0,6))
[1] 7.137119
> print(OptionValue2(50,51,1.2,0.8,1.03,-1,0,0.01,6))
[1] 6.959428
> print(OptionValue2(50,51,1.2,0.8,1.03,1,1,0,6))
[1] 13.29864
> print(OptionValue2(50,51,1.2,0.8,1.03,1,0,0.01,6))
[1] 11.32174

The Current Price of a Stock Is $50