Question

The interest effective annual interest rate is 10% for lending, and 20% for borrowing, Gamestop stock, SGME, has reached $400 per share (with negligible bid-ask spread). Your friend wants to buy a one-year European put option, with $500 strike price. Currently, one-year at-the-money European call options have a $49.00 $50.00 bid-ask spread. There

are no other taxes nor transactions costs. a) What is the most your friend should pay for the put option? Explain.

b) Your other friend buys a standard American call option, expiring in one year, with a $300 strike price. He wants to exercise the call option immediately, because he thinks $GME stock is near the peak of a bubble, and will soon fall. You tell him "My finance professor taught us that you should never

exercise a call option early." You friend replies "I refuse to sell my call option!" If your friend refuses to sell the call option, then what strategy is strictly better than exercising it? Explain, and prove that this strategy always make more money than exercising the option.​

Answer 1

Answer:

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