Consider a 2-year European put option with a strike price of $52 on a stock whose current price is $50. We suppose that there are two time steps of 1 year, and in each time step the stock price either moves up by 20% or moves down by 20%.The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a two-year European put option?

Consider a 2-year European put option with a strike price of $52 on a stock whose current price is $50. We suppose that there are two time steps of 1 year, and in each time step the stock price either moves up by 20% or moves down by 20%.The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a two-year European put option?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.A: The Black-scholes Option Pricing Model

Problem 1P

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