Question: For a 2-year Asian arithmetic average price call on a stock, based on the average price in each of 2 years, you are given: The

For a 2-year Asian arithmetic average price call on a stock, based on the average price in each of 2 years, you are given:

  • The price of the stock is 90.

  • The strike price is 95.

  • The continuously-compounded risk-free interest rate is 9%.

  • The stock pays no dividends, and its volatility is 25%.

    The option is priced using a 2-period binomial tree based on forward prices. Determine the option premium. Hint: Your binomial tree will be non-recombining.

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