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9.7 Using simple binomial trees, calculate the value of a combined call and put option with the following characteristics: Underlying asset current value =2,000. Contraction
9.7 Using simple binomial trees, calculate the value of a combined call and put option with the following characteristics: Underlying asset current value =2,000. Contraction option =50% reduction in value. Savings from contracting =450. Expansion option =15% increase in value. Exercise price to expand =100. Up movement per period =1.15,d=1/u. Risk-free rate =10%. Time to expiration =2 years. Number of time periods per year =1. The steps you will need to follow include Create the event tree for the underlying risky asset. Calculate whether to exercise either option on the end nodes of the option valuation tree. Use replicating portfolio technique to value the option
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