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Binomial Option Pricing: Consider a two-period binomial model, where each period is 6 months. Assume the stock price is $46.00, = 0.28, r = 0.06
Binomial Option Pricing:
Consider a two-period binomial model, where each period is 6 months. Assume the stock price is $46.00, = 0.28, r = 0.06 and the dividend yield is 2.0%. What is the maximum approximate strike price where early exercise would occur with an American call option?
According to my professor, the answer is 19.26. His explanation:
We need to solve for K in the following inequality
max(Su-K, 0) e^(-r*h)*(p* max(Suu-K, 0) + (1 - p*)max(Sud - K))
Can you explain how to solve that and to arrive at the answer of 19.26? Thanks!
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