A stock is currently traded at $50 a share with a volatility of 30% and a dividend yield of 2%. The risk-free rate is 5% with continuous compounding. Using the Black-Scholes-Merton formula, calculate the price of a 6-month European put option with a strike price of $55. Now, assuming the put option is American with same strike price and maturity, use a two-step binomial model to price the put option. Will the American put be exercised earlier before expiration? Why or why not?

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FRIDAY Data Given 8 Time to expory 6monts Stock Price So 50 Volatility Dividend ield921 risk ... View the full answer