Question: Let S = $45, K = $55, r = 6% (continuously compounded), d = 5%, s = 35%, and T = 2. What are the

Let S = $45, K = $55, r = 6% (continuously compounded), d = 5%, s = 35%, and T = 2. What are the appropriate values of u and d to build a 2-period binomial stock price tree? (Use the formulas from the main part of the chapter and lecture notes, not the alternative formulas in the appendix.)

Correct answer:

u = 1.4333; d = 0.7118

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