Question

Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and a European-style option with the same strike price, expiration, and underlying stock. Franklin believes that the European-style option will have a higher premium than the American-style option. Franklin is asked to value a one-year European-style call option for Abaco Ltd. common stock, which last traded at $42.00. He has collected the following information:

- Closing stock price $42.00
- Call and put option exercise price $44.50
- One-year put option price $5.50
- One-year Treasury bill rate 6.50%
Time to expiration One year
a. Calculate, using put-call parity and the information provided, the European-style call option value. Do not round intermediate calculations. Round your answer to the nearest cent.
$_______

Answer 1

To calculate the European-style call option value, we can use put-call parity formula. However, since the question does not provide information about dividends, it is not possible to calculate the specific value.

Step-by-step explanation:

Joel Franklin is observing an American-style option and a European-style option with the same strike price, expiration, and underlying stock. He believes that the European-style option will have a higher premium. To calculate the European-style call option value, we can use put-call parity formula:

European Call Option Value = American Call Option Value - Present Value of Dividends

Solving for the American Call Option Value:

American Call Option Value = European Call Option Value + Present Value of Dividends

The present value of dividends can be calculated using Treasury bill rates and the time to expiration. However, the question does not provide information about dividends, so it is not possible to calculate the specific European-style call option value.