TWO STEP BINOMIAL TREES (derivitives)

1. A stock is trading at $172.78, given the following conditions:

Strike price is $180.00

Continuously compound rate of return is 3.2278%pa

Time to expiry of the option is 2 years

Number of steps is 2

Volatility of the stock is 44.15%

Dividend in 12 months is expected to be $2.78

Dividend in 2 years is expected to be $2.88 Determine for an American call option:

(a) Option price

(b) Delta of the option

Probability of a move up in price = ^ / ( )

Option price: = ^ + 1 d