Chapter 21, Problem 22PS

American options The current price of the stock of Mont Tremblant Air is C$100. During each six-month period it will either rise by 11.1% or fall by 10% (equivalent to an annual standard deviation of 14.9%). The interest rate is 5% per six-month period.

1. a. Calculate the value of a one-year European put option on Mont Tremblant’s stock with an exercise price of C$102.
2. b. Recalculate the value of the Mont Tremblant put option, assuming that it is an American option.