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Construct a four-step binomial tree to price

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A stock is currently traded at $60. The standard deviation of the stock return is 30% per annum. The riskless interest rate is 5% per annum. The terminal payoff of the derivative is specified as: Payoff = 3 ST + 10

(i) Suppose that the derivative is a knock-out option with one year remaining. The barrier is set at $80. Construct a four-step binomial tree to price this barrier option.

(ii) Suppose that the derivative is a knock-in option with one year remaining. The barrier is set at $80. Construct a four-step binomial tree to price this barrier option.

 

 

Reference no: EM133071685

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