Consider an at-the-money 6-month American put options on a non-dividend-paying stock. The price of the stock is $72 now and it can move up by 25% or down by 20% each of 3-month period for the next 6 months. The risk-free interest rate in this world is zero with continuous compounding.

1. Determine the value of the American put by constructing a binomial tree showing the stock price and option’s value at each node of the binomial tree.

 

Answer rating: 100% (QA)

Binomial Tree for American Put Option Setting Up the Tree Stock Price MovementsUp 25 and Down 20 each period Number of Periods2 as the option has 6 mo... View the full answer