4 2 points Suppose that the exchange raw between US Dollar a

4. (2 points) Suppose that the exchange raw between US Dollar and Euro is 8OE92/?. Let rs = 4%, r = 3%, u = 1.2, d = 0.9, T = 0.75, n = 3, K = S0.85. a. What is the price of a 9-month European call? b. What is the price of a 9-month American call?

Solution

The put-call parity formula (for a European call and a European put on a stock with the
same strike price and maturity date) is
C ? P ? ? 0, P ( )
F T K
? ? PV0,T (K)
? ? Ke?rT
= S0 ? Ke?rT,
because the stock pays no dividends
We are given that C ? P ? 0.15, S0 ? 60, K ? 70 and T ? 4. Then, r ? 0.039.