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The current price of a non-dividend-paying stock is 60. Each month the price rises by 15% or falls by 10%. The monthly risk-free rate is
The current price of a non-dividend-paying stock is 60. Each month the price rises by 15% or falls by 10%. The monthly risk-free rate is 3% per period. Consider an American put option with maturity T =2 months and strike 67. Assume the investor can exercise the option at t=0, t=1, and t=2. Find the prices of the American put option at t=0 and at t=1 in all states. Find the option delta in all nodes of the binomial tree. Replicate the stock prices in month 1 by trading put options and the riskless asset (lending or borrowing).
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