Kevin examines both American- and European-style options that have the same stock, expiration date, and strike price. Kevin argues that the European-style option will be sold at a higher price than the American-style option.
A. Examine Kevin’s belief given that the stock closed at $40, has an exercise price of $42 on the put and call options, the one-year put option is $3, the Treasury bill is 4.5%, and it expires in one year.
B. Calculate the value of a European-style option given put-call parity.
C. Determine the impact on the call option if (i) there is a rise in volatility; (ii) there is an increase in interest rate; and (iii) the time of option expiration declines.