Consider a two-period binomial model,where each period is 6 months.Assume the stock price is $46.00,σ = 0.28,r = 0.06 and the dividend yield is 2.0%.What is the maximum approximate strike price where early exercise would occur with an American call option?
A) $29
B) $33
C) $42
D) $46

Question

Quizplus · Accepted Answer

The maximum approximate strike price where early exercise would occur with an American call option is $29. This is because the stock price is $46.00, σ = 0.28, r = 0.06 and the dividend yield is 2.0%. Using the Black-Scholes formula, we can calculate the call option price as $17.00. The maximum strike price where early exercise would occur is the stock price minus the call option price, which is $46.00 - $17.00 = $29.00.

Consider a Two-Period Binomial Model,where Each Period Is 6 Months