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Consider a stock currently priced at $25 with an expected volatility of 25%p.a. A dividend of...

Consider a stock currently priced at $25 with an expected volatility of 25%p.a. A dividend of $2.50 is expected in 1.5 months. You are working for a bank and one of your clients wants to buy a call option on the stock with a maturity of three months and a strike of $24. a) The client has asked you to quantify what the additional cost will be if they have the right to exercise the call option early. Use a three-step binomial model and assume a constant risk-free rate of 4% p.a. continuously compounded. b) If the client buys an option that allows for early exercise, based on the pricing model, when would you advise them to exercise this right?

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