Interest rates are expressed as annualized rates for the term specified. Report your interest rate answers as fractional numbers like 0.11 for 11% per year.
Problem .
A stock is currently trading at D1. The annual volatility is D2. The risk-free interest rate is D3 percent per annum with continuous compounding.
What is the current value of a six-month American Put option with strike price of D4 using a five-step binomial tree? Find the following.
1.Value of "u".
2. Value of "d"
3. Value of risk-neutral probability "p."
4. Current fair value of American Put.
5. Write the value of the stock on the tree where pre-mature exercise of the American put is optimal. Report "0" if premature exercise of the option is not optimal.
D1=50.94
D2=1.46
D3=6.188
D4=51.94