Question: You use the following information to construct a binomial forward tree for modeling the price movements of a stock. (i) The length of each period

You use the following information to construct a binomial forward tree for modeling the price movements of a stock.

(i) The length of each period is 4 months.

(ii) The current stock price is 100.

(iii) The stock’s volatility is 30%.

(iv) The stock pays no dividends.

(v) The continuously compounded risk-free interest rate is 8%.

Let PI be the price of a 95-strike 1-year European put option on the stock, and PII be the price of an otherwise identical American put option.

Calculate PII − PI.

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