Consider a 3-month put option. Suppose that the underlying stock price is $16, the strike $15.5, the interest rate is 10% p.a., stock volatility is 5% per month

a)Assume that:

dt = 0.0833

u = 1.0513

a = 1.0084

p = 0.5711

What is the probability of stock price going down?

Suppose that dynamics of the stock price process can be represented by the following binomial tree:

B. compute the price of the european put option using a 3 step binomial tree.

c. Compute the price of the American put option using a 3 step binomial tree.

16.000 16.820 15.220 17.683 16.000 14.477 18.589 16.820 15.220 13.771