If interest rates are expected to change as per the given tree, what is the price of
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Question:
If interest rates are expected to change as per the given tree, what is the price of a European call option written on a bond that will mature in the beginning of the 4th period? The bond has a Par of $100 and a per period coupon of 15%. The interest rates move up or down at each node with equal probability. The option has a Strike of $98 and will expire in three periods. (hoping to see the math, thanks, tree below:)
t=0 | t=1 | t=2 | t=3 | t=4 |
| | | | 20.81% |
| | | 17.20% | |
| | 14.22% | | 13.59% |
| 11.75% | | 11.23% | |
9.71% | | 9.28% | | 8.87% |
| 7.67% | | 7.33% | |
| | 6.06% | | 5.79% |
| | | 4.79% | |
| | | | 3.78% |
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