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Question 1 (4 marks) A stock selling at $50 is expected to pay no dividend and...

Question 1

A stock selling at $50 is expected to pay no dividend and has a volatility of 40%. Consider put options with a 6-month maturity and a $50 strike price. The risk-free rate is 10% per annum continuously compounded.
Consider a three-step binomial tree.
(a) Use the binomial tree to price the put option if it is American.

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Answer #1

Solution:

The price of the option is $4.982

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