Find the risk-neutral probability

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Reference no: EM131984722

A stock price is currently $40. The annualized volatility σ of the stock return is 40%. The continuously compounded risk-free interest rate is 12% per year. Use a 2-step binomial tree to find the value of the 6-month American put option with strike price $45. (1) Use the Cox-Ross-Rubinstein approach to find u and d. (2) Draw the 2-step tree. (3) Find the risk-neutral probability. (4) Compute ? of the option along the tree. (5) Find the option value.

Reference no: EM131984722

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