Question
Suppose S = $100, K = $95, r = 8% (continuously compounded), T = 1, = 30%, and = 5%. Use an eight-period lognormal binomial
Suppose S = $100, K = $95, r = 8% (continuously compounded), T = 1, = 30%, and = 5%. Use an
eight-period lognormal binomial tree to answer the following questions.
You can also use Excel for this question. If you do so, please upload the Excel file separately with the
detailed calculations.
(a) Construct the stock tree.
(b) Compute the prices of an European call option.
(c) Compute the prices of an American put option.
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Personal Finance
Authors: Jeff Madura, Hardeep Singh Gill
3rd Canadian Edition
978-0133035575, 133035573, 978-0133970524, 133970523, 978-0134040042
