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What is the value of a 6-month european put option

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Reference no: EM132853749

Question 1

A stock price is currently $40. The risk-free interest rate is 12% per annum with continuous compounding. Annual continuously compounded volatility is 10%. Construct a binomial tree for two periods and calculate the value of the options by working back through the binomial tree.

a) What is the value of a 6-month European put option with a strike price of $42?

b) What is the value of a 6-month American put option with a strike price of $42?

c) What is your replicating portfolio today for a 6-month European put and American

Put option with a strike price of $42?

Question 2:

Let S=$300, K=$300, r=10% risk-free interest rate, (continuously compounding), T=3 years, n=3, three-period binomial tree, δ =6.5%, continuous dividend yield on the stock, u=1.25, and d=0.7.

a) Construct the binomial tree for the stock.

b) Compute the prices of American and European calls.

c) Compute the prices of American and European puts by using risk-neutral approach.

Reference no: EM132853749

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