Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an...

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Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and European style option with the same strike price, expiration and underlying stock.Frankiln believes that the european style option will have a higher premium than the American style option.a.Critique Franklin belief that the european style option will have a higher premium. Franklin is asked to value a one year european style call option for Abaco ltd. coom stock, which last traded at $43.00. he has collected the following information:Closing stock price $43.00Call and put option exercise price $45.00One year put option price $ 4.00One year treasury bill rate 5.50%Time to expiration one yearb. Calculate using put call parity and the information provided, the european style call option value.c. State the effect, if any of each of the following three variables on the value of a call option:1. an increase in short-term interest rate2. an increase in stock price volatility and 3. a decrease in time to option expiration.

Tanmoy · Accepted Answer

Derivatives – American and European Options						1
Derivatives – American and European Options	8
DERIVATIVES – AMERICAN AND EUROPEAN OPTIONS
Table of Contents
Answer A	3
Answer B	3
Answer C	4
References	5
Answer A
The assumption or belief of Joe Franklin is inappropriate. There are two important types of options which are available in American and European styles. Both the styles have almost similar characteristics but the only difference is that while American style of options can be exercised at any time prior to the option expires, a European style of option on the other hand can be exercised only at the time of expiration (Majaski, 2021). Further, at the time of expiration of the option,

Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an American-style option and European style option with the same strike price, expiration and underlying...

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