A gold futures price is currently $70 per ounce of gold, its volatility is 20% continuously compounded
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Question:
A gold futures price is currently $70 per ounce of gold, its volatility is 20% continuously
compounded annually, and the risk-free interest rate is 6% annual. Using two-period
binomial model, calculate the following:
a) What is the value of a 6-month European put option on the gold futures with a strike
price of $65?
b) What is the value of a 6-month American put option on the gold futures with a strike
price of $65?
c) What is your replicating portfolio today for a 6-month European put and American
Put option with a strike price of $65?
How is this solved step by step?
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