You use the following information to construct a binomial forward tree for modeling the price movements of

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You use the following information to construct a binomial forward tree for modeling the price movements of a stock. (This tree is sometimes called a forward tree.)

(i) The length of each period is one year.

(ii) The current stock price is 100.

(iii) The stock’s volatility is 30%.

(iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 5%.

(v) The continuously compounded risk-free interest rate is 5%.

Calculate the price of a two-year 100-strike American call option on the stock.

(A) 11.40

(B) 12.09

(D) 13.47

(E) 14.16

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:11 AM

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You use the following information to construct a binomial forward tree for modeling the price movements of

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Derivative Pricing

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