Calculate the value of a derivative

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A stock price is currently $30. During each 2-month period for the next 4 months it will increase by 8% or reduce by 10%. The risk-free interest rate is 5%.

Use a two-step tree to calculate the value of a derivative that pays off [max(30 - S_T ; 0)]² , where ST is the stock price in 4 months. If the derivative is American-style, should it be exercised early?

Reference no: EM131237459

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