A stock price is currently $30. Each month for the next two months it is expected to
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A stock price is currently $30. Each month for the next two months it is expected to increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off max[(30 — ST)2, 0], where ST is the stock price in two months? If the derivative is American-style, should it be exercised early?
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