Consider a stock whose current price is $150 per share. You would like to value an American put option on this stock that matures in two years. Assume that the strike price for this put option is $170 per share and that in each period the stock can go either up or down. It can go up by 10% per period, where period is one year. Further, assume that the risk-free rate is 5% per annum with continuous compounding. Use a 2-step binomial tree to value this option.

a.            Calculate risk-neutral probability of up and down movement in 1-period.

b.            Construct binomial price tree. Draw the tree below and indicate stock prices at all nodes. (5 pts)

c.             Calculate option values at maturity. Indicate your answers on the tree above.

d.            Calculate option values at intermediate nodes. Indicate your answers on the tree above.

e.            What is the value of this option as of today? Indicate your answer on the tree above

f.             Would you exercise this option at any of the nodes on the binomial tree you constructed in part (a)? Explain

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a Calculate riskneutral probability of up and down movement in 1period The riskneutral probability o... View the full answer