Question
A European put option has a strike price of $75 and expires in six months. It is written over a stock that is currently $80,
A Europeanputoption has a strike price of $75 and expires in six months. It is written over a stock that is currently $80, but could either increase by 5% or decrease by 5% overeachof the next two three-month periods.The risk-free interest rate is 5% per annum with continuous compounding.
i)On the binomial tree diagram below identify the stock prices in the positions indicated by the letters A to F, and the value of the put option at positions D, E and F.
ii)Calculate the price of this option today.
iii)Explain why the corresponding American put has the same value.
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