Question: 4. Consider a one-period binomial model with h = 1, where S = ($100), r = 0.08, = 30%, and = 0. Compute

4. Consider a one-period binomial model with h = 1, where S = \($100\), r = 0.08,

σ = 30%, and δ = 0. Compute American put option prices for K = \($100\), $110,

\($120\), and $130.

a. At which strike(s) does early exercise occur?

b. Use put-call parity to explain why early exercise does not occur at the other strikes.

c. Use put-call parity to explain why early exercise is sure to occur for all strikes greater than that in your answer to (a).

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