A stock is expected to increase or decrease by 20% every 6 months over the next year.
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Question:
A stock is expected to increase or decrease by 20% every 6 months over the next year. The current stock price is $50. The 6-month riskfree rate is 10% (semi-annually compounded).
(a) (15 pts) What is the price of an at-the-money European put (ie. strike price= current stock price) with a maturity of one year?
(b) (15 pts) What is the price of an at-the-money American put with a maturity of one year? What is the exercise policy for this American put? Be specific of whether and when early exercising the option is optimal.
Related Book For
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
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