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

You use the following information to construct a binomial forward tree for modeling the price movements of a nondividend-paying stock:

(i) The length of each period is 6 months.

(ii) The current stock price is 100.

(iii) The stock’s volatility is 20%.

(iv) The continuously compounded risk-free interest rate is 6%.

Let PI be the price of a 120-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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