Question
Round values of q to 4 decimal places and prices to 2 decimal places. A three-period binomial tree BT3 is defined by the following parameter
Round values of q to 4 decimal places and prices to 2 decimal places. A three-period binomial tree BT3 is defined by the following parameter vector: (s0, r, d, u, n) = (17, 0.03, 0.95, 1.08, 3). Let r be the risk free rate per period. Answer the following questions: a) Calculate the risk-neutral probability of a downward movement. b) Calculate the payoff profile of a European Call option with exercise price K = 12. c) Price the European Call option of b). d) What is the value of the Call option, if the stock realised an upward movement from t = 0 to t = 1? e) Price an American Put option with exercise price K = 17.50. 5 Points, MC Answer
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