The current price of a non-dividend-paying stock is $50 andthe volatility of a non-dividend paying stock is20%per annum.

Use a two-step tree to value an American putoption 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