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Problem:

Assume a two-period binomial process in which the current underlying is priced equal to $100. At the end of each period, the underlying can either go up by 25% (u=1.25) or down by 10% (d=0.90). The risk-free rate is 7%. The underlying does not pay dividends or interest.

Required:

Question: What is the American put price (intrinsic value) if the exercise price of the American put is equal to $90?

Note: Provide support for your rationale.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91174427

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