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The current price of a non-dividend paying stock is $30. Use a two-step tree to value a put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk free rate is 8% per annum with continuous compounding.   1) What should be the EUROPEAN put option price today? 2) If the option was an AMERICAN put option, what should be the price today?  3) If the volatility was given as 30%, how would the AMERICAN put option price change?  Volatility is 30%,

The current price of a non-dividend paying stock is $30. Use a two-step tree to value a put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk free rate is 8% per annum with continuous compounding.   1) What should be the EUROPEAN put option price today? 2) If the option was an AMERICAN put option, what should be the price today?  3) If the volatility was given as 30%, how would the AMERICAN put option price change?  Volatility is 30%,

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
Problem 4MC
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The current price of a non-dividend paying stock is $30. Use a two-step tree to value a put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk free rate is 8% per annum with continuous compounding.

 

1) What should be the EUROPEAN put option price today?

2) If the option was an AMERICAN put option, what should be the price today? 

3) If the volatility was given as 30%, how would the AMERICAN put option price change? 

Volatility is 30%, 

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