QUESTION 7

Consider a 2-year EUROPEAN PUT with a strike price of $65 on a stock whose current stock price is $60. Suppose that there are two time steps, and in each time step the stock price either moves up by 20% or moves down by 20%. Also suppose that risk-free rate is 5%per annum with continuous compounding. What is the value of the European put option?

6.46

4.89

5.19

QUESTION 9

Current price of a non-dividend paying stock is $50. Use a two-step tree to value an AMERICAN PUToption on the stock with a strike price of $52 that expires in 6 months. Each step is 3 months and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk-free rate is 7% per annum continuous compounding. What should be this American put option price?

$7.43

$3.42

$4.64