Question
Use binomial tree to answer question please show how you get each value of the tree Part a A stock price is currently $50. Over
Use binomial tree to answer question please show how you get each value of the tree
Part a
A stock price is currently $50. Over each of the next two - three month periods it is expected to go up by 6% or down by 5%. The risk free interest rate is 5% per annium with continuous compounding. What is the value of a six month European call option with the strike price of $51?
part b
How much would the put option be with the same strike price ? Argue without calculation what happens (increase or decrease) to the call and the put if the strike price $52? Verify this with a calculation of the European put.
part c
with out calculation, how does the put option price change if this were changed to an American put option (instead of european)? What is the value of the the American put ? And what is its value if you are instead using volatily of .20?
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