The following two-step binomial tree depicts the quarterly price path of an underlying share for an American call option. Each step represents a quarter of a year. The strike price of this option is $40 and the risk free rate is 7% pa.

a)Calculate the payoff of the option at point (b). Give your answer in dollars and cents to the nearest cent.

Payoff at point (b) = $

b)Calculate the value of the option at point (b). Give your answer in dollars and cents to the nearest cent.

Value of the option at point (b) = $

Binomial Share Prices
a)	$40.00
b)	$42.80
c)	$37.20
d)	$45.80
e)	$39.80
f)	$34.60

 

Transcribed Image Text:

d) b) a)< c) f) d) b) a)< c) f)

Answer rating: 100% (QA)

a 1088 b 1051 Stepbystep explana... View the full answer