Question: For a two-period binomial model, you are given: Each period is one year. The current price for a non-dividend paying stock is $20. u =

For a two-period binomial model, you are given: Each period is one year. The current price for a non-dividend paying stock is $20. u = 1.3, where u is one plus the rate of capital gain on the stock per period if the stock price goes up. d = 0.7, where d is one plus the rate of capital loss on the stock per period if the stock price goes down. The risk-free interest rate is 5%. (a) Calculate the price of an American call option on the stock with a strike price of $22. How does it compare to the price of a European call option? (b) Calculate the price of an American put option on the stock with a strike price of $22. How does it compare to the price of a European put option?

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