A stock price is currently $60. During each one-month period for the next two months it will increase by 6% or decrease by 6%. The risk-free rate is 5% p.a. (a) Use a two-step tree to calculate the value of a European put option with a strike price of $62. (b) If the put option were American, would it ever be optimal to exercise it early at any of the nodes on the tree? Show your reasoning. What is the value of this American option?
A stock price is currently $60. During each one-month period for the next two months it will increase by 6% or decrease by 6%. The risk-free rate is 5% p.a. (a) Use a two-step tree to calculate the value of a European put option with a strike price of $62. (b) If the put option were American, would it ever be optimal to exercise it early at any of the nodes on the tree? Show your reasoning. What is the value of this American option?
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
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Transcribed Image Text:4. A stock price is currently $60. During each one-month period for the next two months
it will increase by 6% or decrease by 6%. The risk-free rate is 5% p.a.
(a) Use a two-step tree to calculate the value of a European put option with a strike
price of $62.
(b) If the put option were American, would it ever be optimal to exercise it early at
any of the nodes on the tree? Show your reasoning. What is the value of this
American option?
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