Suppose you consider holding the stock for two years, and each year it either goes up by 30% or down by 20%.The company has already announced its dividend policy: it will pay a $15 dividend immediately before the stock price goes above $70. You hold a Bermudan call option with strike price K= $55, which expires in two years. You can exercise your option today, in one year from now, or in two years. Should you exercise the option early? (Hint:
There is no shortcut for this problem. You have to do the work. Draw the stock payoff diagram, and make sure you factor in the $15 dividend payment when the value of the stock is larger than $70.)
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