1) Compute the price of an American call option with strike K=110 and maturity T

Question

1) Compute the price of an American call option with strike K=110 and maturity T=.25 years.

2) Compute the price of an American put option with strike K=110 and maturity T=.25 years.

3) Is it ever optimal to early exercise the put option of Question 2?

4) If your answer to Question 3 is "Yes", when is the earliest period at which it might

be optimal to early exercise? (If your answer to Question 3 is "No", then you should

submit an answer of 15 since exercising after 15 periods is not an early exercise.)

5) Do the call and put option prices of Questions 1 and 2 satisfy put-call parity?

6) Compute the fair value of an American call option with strike K=110 and maturity

n=10 periods where the option is written on a futures contract that expires after

15 periods. The futures contract is on the same underlying security of the previous

questions.

7) What is the earliest time period in which you might want to exercise the American

futures option of Question 6?


(That's all the information provided by the exercise)

Explanation / Answer

Spot price for call option 110, say 120 Price 0 10=120-110 Spot price for put option 110, say 120 Price 10=110-100 0 net=0+10=10 net=10+0=10 If the spot price is

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