A stock index is currently 980, the risk-free rate is 5%, and the dividend yield on the index is 2%. (a) Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum. (b) How much does the option holder gain by being able to exercise early? (By comparing the value to European option.) (c) When would the American option be exercised early?
A stock index is currently 980, the risk-free rate is 5%, and the dividend yield on the index is 2%. (a) Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum. (b) How much does the option holder gain by being able to exercise early? (By comparing the value to European option.) (c) When would the American option be exercised early?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A stock index is currently 980, the risk-free rate is 5%, and the dividend yield on the
index is 2%.
(a) Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum.
(b) How much does the option holder gain by being able to exercise early? (By comparing the value to European option.)
(c) When would the American option be exercised early?
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