• Consider a 3-month European put option on a non-dividend paying stock that is currently priced So = $16 with volatility o = 30% and risk-free rate r = 5.3% and a strike price
• K = 817.
• (a) Using a three-step binomial tree (N = 3), construct the underlying price tree. Show all work. (Report everything to 4 decimal places, except prices, report to 3 decimal places.)
• (b) What is the value of the European put option? (c) Is it possible for the American put option to be $0.10 less than the European put option in this example.

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To solve this problem we will first construct the underlying price tree using a threestep binomial t... View the full answer