Question 7,

Consider the following binomial option pricing problem involving at American call. This call has two periods to go before expiring. Its stock price is $100 and its exercise price is $92. The risk-free rate is 0.05, the value of u is 1.20 and the value of the d is .95. The stock pays a dividend at the end of the first period at the rate of 4%. Construct the 2-period Binomial Tree model and find the value of the call premium.

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