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Current price of a non-dividend paying stock is $50. Use a two-step tree to value an...

Current price of a non-dividend paying stock is $50. Use a two-step tree to value an AMERICAN PUT option on the stock with a strike price of $52 that expires in 6 months. Each step is 3 months and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk-free rate is 7% per annum continuous compounding. What should be this American put option price?

$4.64

$6.10

$3.42

$7.43
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Answer #1

Note:

R = Rate of Interest

d = Fall in Price

u = Increase in price

qu = Probability of Increase in Price

Cup = Payoff of Increase in Price

Cd = Payoff of fall in Price

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