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Question 2 Suppose that you are pricing an American call option on a stock with current price S = 100, K = 80, =
Question 2 Suppose that you are pricing an American call option on a stock with current price S = 100, K = 80, = 40%, that matures in 6-months (T = 1/2). Suppose that the stock will pay a known dividend of $5 in exactly 4 months. Further, suppose that r = 2% (continuously compounded). Compute the price of the call option using a two-period binomial tree. In which nodes, if any, is early exercise of the option optimal? (Note, h = T/n = 0.5/2 = 1/4.)
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