Question: Consider the binomial process in Figure 1 and assume u = .07>r =.06 > d = 0.05, and x = 42. Compute the fair price

Consider the binomial process in Figure 1 and assume u =

Consider the binomial process in Figure 1 and assume u = .07>r =.06 > d = 0.05, and x = 42. Compute the fair price of an American option with terminal payout function G: max{} 43,0}. What can you say about the exercise policy? t=0 t=1 t= 2 xe2u seu o --- xeu+d - ----- Figure 1: Binomial lattice

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