Question
A stock price is currently $20. Over each of the next two three-month periods it is expected to go up by 10% or down by
A stock price is currently $20. Over each of the next two three-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 2% per annum with continuous compounding. Use the binomial tree pricing approach to estimate the value of a six-month American put option with a strike price of $21. The figure below shows the tree to evaluate the option value. At each note, the upper number (S1-S6) is the stock price, the lower number (P1-P6) is the American put price. The value of S1, S2 and S3 are $20, $22 and $18 respectively.
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