Reference no: EM133122645
As a financial analyst at JP Morgan Chase, you are applying a two step bonomial model to value a stock option. A stock price is currently $70. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding and. You want to find the answers to the following questions:
a) What is the value of a six-month European put option with a strike price of $71?
b) If the put option were American, would it ever be optima to exercise it early at any of the nodes on the tree?
Please choose all correct answers. Please note that each incorrect answer will reduce the score by 10%.
1. The value of a six-month European put option is $1.23
2. The value of a six-month American put option is $4.30
3. The value of a six-month American put option is $3.0
4. The value of a six-month European put option is $1.66
5. The value of a six-month American put option is $2.04.
6. The value of a six-month European put option is $1.80
7. It's worthwhile to exercise this put option if it were American.
8. The value of a six-month American put option is $1.80.
9. It's not worthwhile to exercise this put option if it were American
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