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Use the risk neutral probabilities to calculate the value of a three-month American put with the strike price 102 and stock price is $100 now. In 1 month it can go 5% up or down. In the second month it can go 5% up or down. And in the third month it can go 5% up or down. Construct a binomial tree for this stock. The annual interest rate is 10% with continuous compounding. Calculate the put value at each node of the tree by comparing with early exercise value. Are there any nodes where you should early exercise the put?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92829723

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