Question: Question 8. Binomial trees and American options (5 points). A stock price is currently $40. Over each of the next two three-month periods it is

Question 8. Binomial trees and American options (5 points). A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum with continuous compounding.

What is the value of a six-month European put option with a strike price of $42? (3 points)

What is the value of a six-month American put option with a strike price of $42? (3 points)

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