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The volatility of a non-dividend-paying stock whose price is $40, is 35%. The risk-free rate is...

The volatility of a non-dividend-paying stock whose price is $40, is 35%. The risk-free rate is 6% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max(?!−52,0)]" where is the stock price in six months?

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Answer #1

The equation , payoff = [max( S - 52,0)] is used to calcuate the payoff for call option. Hence the payoff in the below sum has been calculated accordingly using the same formula. where 52 is the exercise price.

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