Use the risk neutral probabilities

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Reference no: EM131992072

Use the risk neutral probabilities to calculate the value of a three-month American put with the strike price 102 and stock price is $100 now. In 1 month it can go 5% up or down. In the second month it can go 5% up or down. And in the third month it can go 5% up or down. Construct a binomial tree for this stock. The annual interest rate is 10% with continuous compounding. Calculate the put value at each node of the tree by comparing with early exercise value. Are there any nodes where you should early exercise the put?

Reference no: EM131992072

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