Given the following option pricing parameters: Stock: $60 Strike: $60 Volatility: 20% per annum

 

Given the following option pricing parameters:

Stock: $60

Strike: $60

Volatility: 20% per annum

Maturity: 180 days (assume 360 day-year)

Risk-free rate: 9% per annum

Dividend yield: 12% per annum

(a) Price an American Call option with a 5-step Binomial Tree.

(b) Price a Call option again with the Black-Schole Option Pricing Model.

(c) Analyse the reasons for the difference in Call option premiums in parts (a) and (b) above.