Question: 7. Consider a two-step binomial tree model for the price of a stock paying no dividend. Suppose the stock price is 100 now. The stock

7. Consider a two-step binomial tree model for the price of a stock paying no dividend. Suppose the stock price is 100 now. The stock price may go up 20% or down 10% in each step. The risk-free interest rate is 12% per annum with continuous compounding. Determine the price of an American option on the stock maturing in one year with the payoff function g(S) = (130 - S)+ + (S - 110)+. 15 marks] 7. Consider a two-step binomial tree model for the price of a stock paying no dividend. Suppose the stock price is 100 now. The stock price may go up 20% or down 10% in each step. The risk-free interest rate is 12% per annum with continuous compounding. Determine the price of an American option on the stock maturing in one year with the payoff function g(S) = (130 - S)+ + (S - 110)+. 15 marks]

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