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Consider a two-step binomial tree where the spot price of the underlying is currently $20. In each of the two time steps, the spot price
Consider a two-step binomial tree where the spot price of the underlying is currently $20. In each of the two time steps, the spot price may go up by 10% or down by 10%. Suppose that each time step is 3 months long and the risk-free rate is 12% per year. (a) Value a 6-month European call with a strike price of $21. (b) How would your analysis change if you were valuing an American call instead?
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