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Suppose S = $100, K = $95, r = 8% (continuously compounded), t = 1, sigma = 30%, and delta = 5%. Explicitly construct an
Suppose S = $100, K = $95, r = 8% (continuously compounded), t = 1, sigma = 30%, and delta = 5%. Explicitly construct an eight-period binomial tree using the lognormal expressions for u and d: u = e^(r - delta - .5 sigma^2)h + sigma squareroot h d = e^(r - delta - .5 sigma^2)h - sigma squareroot h Compute the prices of European and American calls and puts. u = e^(r - delta - .5 sigma^2)h + sigma squareroot h d = e^(r - delta - .5 sigma^2)h - sigma squareroot h Suppose S = $100, K = $95, r = 8% (continuously compounded), t = 1, sigma = 30%, and delta = 5%. Explicitly construct an eight-period binomial tree using the lognormal expressions for u and d: u = e^(r - delta - .5 sigma^2)h + sigma squareroot h d = e^(r - delta - .5 sigma^2)h - sigma squareroot h Compute the prices of European and American calls and puts. u = e^(r - delta - .5 sigma^2)h + sigma squareroot h d = e^(r - delta - .5 sigma^2)h - sigma squareroot h
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