Question
Consider an American put option on a non-dividend paying stock when the stock price is $70, the strike price is $76, the risk-free rate is
Consider an American put option on a non-dividend paying stock when the stock price is $70, the strike price is $76, the risk-free rate is 4%, the volatility is 20%, and the time to maturity is six months. Using a binomial tree model with 5 time steps, answer the following questions:
a. What is the value of the option? Attach the screenshot of the tree at the end of the report
b. Breakdown the option value into an intrinsic value component and a time-value (insurance) component?
c. Using a trial and error approach determine the range of stock prices (keeping all other parameters constant) for which the time value component of the option would be zero.
d. Ignore the answer in part (c). Discuss what exactly does a time value=0 imply in general?
Please answer all of it!
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