The futures price of a commodity is $85. Use a three-step binomial tree to value a six-month American put option with a strike price of $90. The volatility is 40% and the risk-free rate (all maturities) is 5% with continuous compounding. What is the value of the 6-month American put option given by a three-step binomial tree? Show all calculations for u, d, p, and (1-p) and the calculations related to option value at each node. Will the option be exercised at any node?

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Binomial Tree Valuation for American Put Option Heres how to value the American put option using a threestep binomial tree Step 1 Calculate u d p and ... View the full answer