Question

Consider a two-period binomial model, where each period is 6 months. Assume the stock price is...

Consider a two-period binomial model, where each period is 6 months. Assume the stock price is $46.00, σ = 0.28, r = 0.06 and the dividend yield is 2.0%. What is the maximum approximate strike price where early exercise would occur with an American call option?

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Answer:

From the given see that the period is of 6 months

=>The stock price =$46.00

here the time is 1 year and divided is split into 2 periods of 6 months each

=>divi yield=2.0%

after 6 month volatility is  =0.28

ris free rate =0.06

For call option to occur

after 6 months, 0.28 decrease is given by $46.00*(0.28/100)=$46.00-0.128=$45.87

then in next 6 month 0.06 increase is given by $46.00*(0.06/100=$46.00-0.0276=$45.97

then the maximum strike price is givenn by ($45.87-$45.97 / 0.28 - 0.06)*2.0%=$ 2.367

answered by: anonymous
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