Derive the index price and option price binomial trees

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A stock index is currently 2,500. Its volatility is 30%. The risk-free rate is 5% per annum (continuously compounded) for all maturities and the dividend yield on the index is 1%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 2,480 given by a two-step binomial tree. Show how you derive the index price and option price binomial trees.

Reference no: EM13937243

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