Consider an american call option when the stock price is 19


Consider an American call option when the stock price is $19, the exercise price is $21, the time to maturity is 6 months, the volatility is 25% 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 45 cents. How high can the dividends be without the American option being worth more than the corresponding European option?

 

 

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Finance Basics: Consider an american call option when the stock price is 19
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