You are required to price acall option on XYZ.comwithan exercise price of $60and six months to expiration. The current stock price of XYZ.comis $60, the risk free rate is 8% p.a. (c.c.)and the volatility of the stock price of XYZ.comis 30% p.a..XYZ.comwill pay adividend of $1 in exactly fourmonths’ time. This call option is to be priced using a two-period binomial option pricing model, with three months in each period.
Required:
Draw the two-period tree diagram for the adjustedstock price (that recognizes the impact of the dividend) of XYZ.com. Show the expiration date payoffs from the calloption
Compare an American call option with an otherwise identical European call option on the stock of XYZ.com. What is the value of the right to exercisethe call option before expiry?