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Calculate the value of the option

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Consider a 4-month American put option on a dividend paying stock when the stock price is $40, the exercise price is $50, and the continuously compounded risk-free rate of interest is 12% per annum. The volatility is 30% per annum and a dividend of $3 is expected in 2.5 months. Using a four-step binomial tree, calculate the value of the option. Also, show on the tree when it would be optimal to exercise the option before its maturity.

Reference no: EM132576896

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