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post all the steps Let S = $45, r = 7% (continuously compounded), d = 1%,...

post all the steps

Let S = $45, r = 7% (continuously compounded), d = 1%, s = 25%, T = 2. In this situation, the appropriate values of u and dare 1.36343 and 0.82696, respectively. Using a 2-step binomial tree, calculate the value of a $50-strike European put option.

a.

$6.702
b.

$6.076
c.

$5.282
d.

$5.227
e.

$5.666
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Homework Answers

Answer #1

here , S0 = current stock price

Su = stock price after 1 year if stock price increases

Sd = stock price after 1 year if stock price decreases

Suu = stock price after 2 years if stock price increases

Sdd = stock price after 2 years if stock price decreases

Sud = stock price after 2 years if stock price after 1 year increases and in the 2nd year it decreases

fu = value of option after 1 year if stock price increases

fd = value of option after 1 year if stock price decreases

fuu = value of option after 2 years if stock price increases

fdd = value of option after 2 years if stock price decreases in both years

fud = value of option after 2 years if stock price increases after 1st year and decreases after 2nd year

f = value of option today

hence the correct option is c) 5.282

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