You use the following information to construct a binomial forward tree for modeling the price movements of
Question:
You use the following information to construct a binomial forward tree for modeling the price movements of a nondividend-paying stock:
(i) The length of each period is 6 months.
(ii) The current stock price is 100.
(iii) The stock’s volatility is 20%.
(iv) The continuously compounded risk-free interest rate is 6%.
Let PI be the price of a 120-strike 1-year European put option on the stock, and PII be the price of an otherwise identical American put option.
Calculate PII − PI.
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In a forward tree The riskne...View the full answer
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