Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. a european put option has a strike price of $56 an

A European put option has a strike price of $56 and expires in six months....

90.2K

Verified Solution

Question

Finance

A European put option has a strike price of $56 and expires in six months. It is written over a stock that is currently $59, but could either increase by 5% or decrease by 5% over each of the next two three-month periods. The risk-free interest rate is 4% per annum with continuous compounding.
i) On the binomial tree diagram below identify the stock prices in the positions indicated by the letters A to F, and the value of the put option at positions D, E and F.
ii) Calculate the price of this option today.
iii) Explain why the corresponding American put has the same value.
[3+3+2=8 marks]
2 step binomial tree

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

Design a sine wave generator with adjustable frequency and amplitude. Show circuit diagram please!

Electrical Engineering
Q

Arsenic occurs naturally in very low concentrations. In healthy human adults arsenic blood concentrations are approximately Normally...

Basic Math
Q

Four charges q q q and q are placed respectively at the corners A BC...

Physics
Q

8 Determine the exact value of cos 2 A 0 B 1 C 1 D...

Geometry
Q

se Taylor s theorem to obtain an upper bound for the error of the approximation...

Basic Math
Q

nducted a survey on school start times with two samples of 40 randomly selected students...

Statistics
Q

se the area model to divide 20x 3 3x 2 17x 7 4x 2 x...

Calculus
Q

Find f f x y dA where f x y x and R 4 8...

Calculus
Q

Assume the division is an investment center, and average operating assets were $1,000,000. The noncontrollable...

Accounting
Q

At December 31, the unadjusted trial balance of H&R Tacks reports Equipment of $27,000 and...

Accounting
Q

Comprehensive Problem 1 Part 1: The following is a comprehensive problem...

Accounting
Q

What has been done, and what more do you believe should be done to restore...

Accounting