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You are to price options on a futures contract. A binomial tree models the movements of the futures price. You are given the following information: -Each period is 6 months, h=6months, -Time to maturity of an option, T=1 year -u/d=4/3, where u is 1 plus the rate of gain on the futures price if it is goes up, and d is 1 plus the rate of loss if it goes down. -The risk-neutral probability of an up move, p*=1/3. -The initial futures price is $80. -The continuously compounded risk-free interest rate is 5%. -Let CE be the price of a 1-year 85-strike European Call option on the futures contract, and CA be the price of an otherwise identical American call option on futures contract. Determine the difference between two prices; CA – CE

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Financial Management, Finance

Category:- Financial Management
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