Draw the three-period stock tree

Reference no: EM132175263

Question - Consider the binomial model for an American call and put on a stock whose price is $60. The exercise price for both the put and the call is $45. The standard deviation of the stock returns is 30 percent per annum, and the risk-free rate is 5 percent per annum.

The options expire in 90 days. The stock will pay a dividend equal to 3 percent of its value in 50 days.

(a) Draw the three-period stock tree and the corresponding trees for the call and the put.

(b) Compute the price of these options using the three-period trees.

Reference no: EM132175263

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