Question
An asset has a 2-step binomial tree, with the following information: u = 1.05, d = 0.91, price of asset (S) = 150, risk free
An asset has a 2-step binomial tree, with the following information:
u = 1.05, d = 0.91, price of asset (S) = 150, risk free rate (r) = 2%. There is a strike price (K) for a put option (American) on this asset for $156.
a. what is the risk-neutral probability calculation?
b. draw the 2 step binomial tree. At every node, what are the payoffs and what are the intermediate and final option prices? What is the value of the American put option mentioned above?
c) Now assume the option is a European one instead, but everything else stays the same. What is its value?
d) Find the estimation of the volatility and calculate the delta
Please show all steps and calculations involved so that I can fully understand how to solve. Thank you
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started