Question on options trade

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Reference no: EM133003216

Options trade:

Consider a European put option on a non-dividend-paying stock where the stock price is ££50, the strike price is 50, the risk-free rate is 3.5% per annum, the volatility is 25% per annum, and the time to maturity is 6 months.

1) Calculate u, d and p for a two-step tree. Explain u, d and p. Please show the working and reasoning

2) Value the option using a two-step tree. Please explain the result

3) Would be optimal to exercise earlier the American put option? Please explain the result

4) If it were an American call option would it be optimal to exercise earlier? Please explain the result

Reference no: EM133003216

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