# Question

Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0,

T = 1 year, and n = 3.

a. Verify that the binomial option price for an American call option is $18.283.

Verify that there is never early exercise; hence, a European call would have the same price.

b. Show that the binomial option price for a European put option is $5.979.

Verify that put-call parity is satisfied.

c. Verify that the price of an American put is $6.678.

T = 1 year, and n = 3.

a. Verify that the binomial option price for an American call option is $18.283.

Verify that there is never early exercise; hence, a European call would have the same price.

b. Show that the binomial option price for a European put option is $5.979.

Verify that put-call parity is satisfied.

c. Verify that the price of an American put is $6.678.

## Answer to relevant Questions

Repeat the previous problem assuming that the stock pays a continuous dividend of 8% per year (continuously compounded). Calculate the prices of the American and European puts and calls. Which options are early-exercised? The dollar interest rate is 5% (continuously compounded) and the yen rate is 1% (continuously compounded). Consider an at-the-money American dollar call that is yen-denominated (i.e., the call permits you to buy 1 dollar for ...Let S = $100,K = $95, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = 1. a. Verify that the price of a European put is $7.471. b. Suppose you observe a put price of $8. What is the arbitrage? c. Suppose you ...Let S = $100, σ = 30%, r = 0.08, t = 1, and δ = 0. Suppose the true expected return on the stock is 15%. Set n = 10. Compute European put prices, ∆ and B for strikes of $70, $80, $90, $100, $110, $120, and $130. For each ...Repeat Problem 11.1, only assume that r = 0.08. What is the greatest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price? In Problem 11.1 Consider a ...Post your question

0