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Three-step binomial tree

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Reference no: EM131205198

A stock price is currently $50. Over each of the next two 2-month periods it is expected to go up by 6% or down by 4%. The risk-free interest rate is 5% per annum with continuous compounding.

(a) What is the value of a 6-month European call option with a strike price of $52 using a three-step binomial tree?

(b) Draw the tree mark the value of the option on each nod of the tree.

Reference no: EM131205198

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