Solution-Calculate risk-neutral probability of up and down

Calculate risk-neutral probability of up and down movement

Reference no: EM133114042

Consider a stock whose current price is $150 per share. You would like to value an American put option on this stock that matures in two years. Assume that the strike price for this put option is $170 per share and that in each period the stock can go either up or down. It can go up by 10% per period, where period is one year. Further, assume that the risk-free rate is 5% per annum with continuous compounding. Use a 2-step binomial tree to value this option.

Calculate risk-neutral probability of up and down movement in 1-period.
Construct binomial price tree. Draw the tree below and indicate stock prices at all nodes.
Calculate option values at maturity. Indicate your answers on the tree above.
Calculate continuation values at intermediate nodes. Indicate your answers on the tree above.
What would be the value of this put option today? Indicate your answer on the tree above.
Assume the same inputs given in the problem, if this was an American call option what would be its value today? You can show your work below.

Reference no: EM133114042

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Calculate risk-neutral probability of up and down movement

Reference no: EM133114042

Reference no: EM133114042

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