Calculate the delta of the stock option

Reference no: EM132210936

Question - Consider a European put option on a non-dividend-paying stock where the stock price is $55, the strike price is $53, the risk-free rate is 4% per annum, the volatility is 20% per annum and the time to maturity is 12 months.

(a) Compute u and d.

(b) Consider a three-step tree. Compute the European put price using the three-step binomial tree. (Hint: Î´t = 4 months).

(c) If the option in (a) is American instead of European, would it ever be optimal to exercise it earlier than maturity at any of the nodes of the tree? In which node is the option early exercised?. Compute the American put price.

(d) Calculate the delta of the stock option at each time step in (a).

(e) If the option in (b) is a call instead of put, would it ever be optimal to exercise it earlier than maturity at any of the nodes of the tree? Explain in detail.

Reference no: EM132210936

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