Question

The current price of XL Corporation stock is $40.  In each of the next two years, this stock price can either go up by $15.00 or go down by $15.00.  XL stock pays no dividends.  The one-year risk-free interest rate is 15% and will remain constant.

 

Using the binomial pricing model, calculate the price of a two-year American straddle option on XL stock with a strike price of $40.

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