Question
Suppose S = $100, r = 8% per annum (continuously compounded), t = 1 year, = 30% per annum, and 8 = 5% per
Suppose S = $100, r = 8% per annum (continuously compounded), t = 1 year, = 30% per annum, and 8 = 5% per annum. Construct an eight-period binomial tree for the underlying stock using each of the following models a. Forward binomial tree b. Cox-Ross-Rubinstein binomial tree C. Lognormal tree Using the binomial trees you constructed, please compute the prices an American put struck at K=$95 and has 1 year to expiration. Please highlight early exercise locations on your trees.
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Derivatives Markets
Authors: Rober L. Macdonald
4th edition
321543084, 978-0321543080
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