# Question: Let S 40 K 40 r 8

Let S = $40, K = $40, r = 8% (continuously compounded), σ = 30%, δ = 0, T =

0.5 year, and n = 2.

a. Construct the binomial tree for the stock. What are u and d?

b. Show that the call price is $4.110.

c. Compute the prices of American and European puts.

0.5 year, and n = 2.

a. Construct the binomial tree for the stock. What are u and d?

b. Show that the call price is $4.110.

c. Compute the prices of American and European puts.

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