Options:

Calculate the arbitrage-free price in period 0 of an American call (buy) option on the stock with an exercise price of 10 in period 1,2 or 3. The time-state prices of the stock are shown in the tree

diagram below. The one-period interest rate is 3%

Figure 1: The Lattice for the Stock ggg 40.96 25.60 ggb 17.92 16.00 gbg 17.92 gb 11.20 gbb 7.84 10.00 bgg 17.92 bg 11.20 bgb 7.84 b 7.00 bbg 7.84 bb 4.90 bbb 3.43 Periodo Period 1 Period 2 Period 3