Kevin examines both American- and European-style options thathave the same stock, expiration date, and strike price. Kevinargues that the European-style option will be sold at a higherprice 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, theone-year put option is $3, the Treasury bill is 4.5%, and itexpires in one year.
B. Calculate the value of a European-style option given put-callparity.
C. Determine the impact on the call option if (i) there is arise in volatility; (ii) there is an increase in interest rate; and(iii) the time of option expiration declines.