The current price of a non-dividend-paying stock is $50 and the volatility of a non-dividend paying stock is 20% per annum.

Use a two-step tree to value an American put option on the stock with a strike price of 52 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding.

1. Which of the following is closest to the Cox, Ross, Rubinstein parameter u for a tree with a 6-month time step?

2. What is the risk-neutral probability?

3. What is the value of the American put option?

		#1. u= 1.5692
		#1. u= 1.1519
		#1. u= 1.2575
		#2. p= 0.8525
		#2. p=0.6214
		#2. p=0.5902
		#3. American put value = $3.85
		#3. American put value = $3.19
		#3. American put value = $3.55

I only need Q2 and Q3