On November 1, 2011, Target stock closed at 50. You forecast that six months from that date Target stock price will be either $60 or $40. If the stock price rises to $60, then on November 1, 2012 the price will be either $70 or $50. If the stock price falls to $40, then on November 1, 2012 the price will be either $50 or $30. Using the BOPM, determine the value of two European put options on Target with the same exercise price of $55 that expires on May 2, 2012 and November 1, 2012, respectively. Assume that the six month risk-free rate of return is 2%. Comparing the two prices, what do you observe?

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A 1 3 Step Bionomial Model T 0 T 1 T 2 70 50 30 3 6... View the full answer