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Consider a put on a put compound option, where P1 has a expiry date T1 = 1 and exercise price E1 = 20 and P2
Consider a put on a put compound option, where P1 has a expiry date T1 = 1 and exercise price E1 = 20 and P2 has an expiry date T2 = 3 and exercise price E2 = 90. (a) What is the pay-off function of this compound option at its expiry date? Assume that the current (at t = 0) price of the underlying is S(0) = 100. Apply the binomial method to determine the value of P1 at time t = 0. Use a time step of t = 1. The interest rate is r = 0.05. Consider the case of p = 1/2 with = 0.25.
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