Problem 1 (10 points) Two stage Options A stock price is currently $50 Over each of the next two three month periods it is expected to go up by 6 or down by 5 The risk free interest rate is 6 per annum with continuous compounding What is the value of a six month European put option with a strike price of $51 All formulas and work should be shown on the paper to get credit Use the formula method Draw the tree diagram will all the data, show all the answers on the tree Calculate the last nodes data (Right side) Calculate the middle nodes data (Middle) Calculate the final node data (Left side) If the options were American, would it be optimal to exercise early at any node (Hint Like what we did in the class on Slide 25 posted on blackboard)

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Question: Problem 1: (10 points) Two stage Options A stock price is currently $50. Over each of the next two three-month periods it is expected to

Problem 1: (10 points) Two stage Options

A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 6% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $51?

** All formulas and work should be shown on the paper to get credit. Use the formula method.

Draw the tree diagram will all the data, show all the answers on the tree.
Calculate the last nodes data (Right side)
Calculate the middle nodes data (Middle)
Calculate the final node data (Left side)
If the options were American, would it be optimal to exercise early at any node? (Hint: Like what we did in the class on Slide#25 posted on blackboard)

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