A nine-month American put option on a non-dividend-paying stock has a strike price of $49. The stock price is $50, the risk-free rote is 5% per annum, and the volatility is 30% per annum. Useing a three-step binomial tree we calculate the option price Max[11.95909, (* * (p*X5.964601+(1-p')x17.11859)] = 11.95909 Bolded values are a result of exercise Growth factor per step, a = 1.0126 Probability of up move, p = 0.5043 Up step size, u = 1.1618 Down step size, d = 0.8607 78.41561 0 67.49294 0 58.09171 58.09171 1.429187 50 4.289225 50 2.91968 43.0354 7.308214 43.0354 5.964601 37.04091 11.95909 31.88141 17.11859 Node Time: 0.0000 0.2500 0.5000 0.7500 would be optimal to exercise early at 11.95909 would not be optimal to exercise early at 11.95909 the fair value of the option turns out to be to continuation choice