What is the pseudo probabilities

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Suppose Aurora's management decides to buy a stock whose current price is $900, the volatility is 30%, the risk-free rate is 5% per annum (continuously compounded for all maturities). Use the three-step tree to value a nine-month American call and put option with strike price $930 and with the following payoffs of max[(???? - ??)]^3 for the call option and max[(800-????)]^2 for the put option. Draw the binomial tree, determine the up and down factors, what is the percentage of up and down movements, what is the pseudo probabilities. In which node of the tree can the American call and put option be exercised early.

Reference no: EM133239426

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