Interest rates are expressed as annualized rates for the, Ask an Expert

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Interest rates are expressed as annualized rates for the term specified. Report your interest rate answers as fractional numbers like 0.11 for 11% per year.

Problem .

A stock is currently trading at D1. The annual volatility is D2. The risk-free interest rate is D3 percent per annum with continuous compounding.

What is the current value of a six-month American Put option with strike price of D4 using a five-step binomial tree? Find the following.

1.Value of "u".

2. Value of "d"

3. Value of risk-neutral probability "p."

4. Current fair value of American Put.

5. Write the value of the stock on the tree where pre-mature exercise of the American put is optimal. Report "0" if premature exercise of the option is not optimal.

D1=50.94

D2=1.46

D3=6.188

D4=51.94

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92767087

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