A 9 month European call option on a non dividend paying stock has K = 78: S0 = 80 r=4% per year and ó=20% per year.

(a) Find u and d and the risk neutral probability p.

(b) Using a 3 step Binomial Option Pricing Model, Önd the price of a 9 month European call option. Draw the tree and write the relevant information (the stock price above and the value of the option below) at each node.

(c) If the option were American instaed of European, when would it be optimal to exercise early?

Answer rating: 100% (QA)

aThe parameters of a binomial model can be calculated as follows u up factor expt exp020sqrt912 1151... View the full answer