The current price of a non-dividend paying stock is $90. Use a two-step binomial tree to value a European call option on the stock with a strike price of $88 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum with continuous compounding. What is the option price when u = 1.2 and d = 0.8? Assume that the option is written on 100 shares of stock.
Two-step binomial model can be used to calculate option price. In this case various variables needs to be worked out. Using this model, in above mentioned example, value of call option is 11.50 $. Please refer pictures for in detail explanation
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