Question: Consider a stock that does not pay dividends. The stock process follows Geometric Brownian Motion dSt = Stdt + StdBt, with = 5% and =

Consider a stock that does not pay dividends. The stock process follows Geometric Brownian Motion

dSt = Stdt + StdBt,

with = 5% and = 40%. The current stock price is S0 = $200. The continuously compounded riskfree rate is r = 10%.

Consider an American call option with strike price $250 and one-year maturity.

(a): construct a two-step binomial tree to calculate the stock price dynamics, with each step being six-month.

(b): Use your constructed binomial tree in part (a) to price the American call option with strike price $250 and one-year maturity.

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