The current price of the common stock of Internet Enterprises is $100. Over the course of a year, the stock's price will either increase by 100% or decrease by 50%. The stock pays no dividends. The current prices of one-period and two period zero coupon risk free bonds are $909.09 and $826.45 respectively ($1000 face value and the period here is 6 months).

A special European option has recently been created on the common stock of Internet with the following terms: On the expiration date the holder of the option has the right to sell the underlying asset for the highest stock price that occurred during the life of the option inclusive of the date on which it was issued. What is the current value of this newly issued option on Internet Enterprises.? Consider a two-period binomial tree.

Answer rating: 100% (QA)

The value of the newly issued option on Internet Enterprises is 4864 Heres how we can find the value of the option using a twoperiod binomial tree 1 D... View the full answer