How much is gained from exercising early at the lowest node

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Reference no: EM131239510

How much is gained from exercising early at the lowest node at the 9-month point in Example?

Example:

Consider a 1-year American put option on the British pound (GBP). The current exchange rate (USD per GBP) is 1.6100, the strike price is 1.6000, the US risk-free interest rate is 8% per annum, the sterling risk-free interest rate is 9% per annum, and the volatility of the sterling exchange rate is 12% per annum.

In this case, The life of the option is divided into four 3-month periods for the purposes of constructing the tree, so that In this case, q = r_f and equation gives

Reference no: EM131239510

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