Consider a two step binomial tree model for an American put option whose strike price is...
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Consider a two step binomial tree model for an American put option whose strike price is K = 101, with the following parameters: Sto u = 1.1, d = 0.9, 1+rAt=1.02. Find the no-arbitrage price of the option at time zero and describe/give the replication strategy. Note: For an American put option, its holder can exercise the option at any time of to, t1, t2, and the payoff of the option at the exercise time tk is given by (K-St)+. So = 100 SU = 110 St = 90 Suu Sud Sdu = = 121 = 99 = 99 Sdd = 81 t2 Consider a two step binomial tree model for an American put option whose strike price is K = 101, with the following parameters: Sto u = 1.1, d = 0.9, 1+rAt=1.02. Find the no-arbitrage price of the option at time zero and describe/give the replication strategy. Note: For an American put option, its holder can exercise the option at any time of to, t1, t2, and the payoff of the option at the exercise time tk is given by (K-St)+. So = 100 SU = 110 St = 90 Suu Sud Sdu = = 121 = 99 = 99 Sdd = 81 t2
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