Question

Consider a one-period binomial model with h = 1, where S = $100, r = 0.08, σ = 30%, and δ = 0. Compute American put option prices for K = $100, $110,$120, and $130.
a. At which strike(s) does early exercise occur?
b. Use put-call parity to explain why early exercise does not occur at the other strikes.
c. Use put-call parity to explain why early exercise is sure to occur for all strikes greater than that in your answer to (a).


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  • CreatedAugust 12, 2015
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