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Consider a stock that does not pay dividends. The stock process follows Geometric Brownian Motion
dSt = Stdt + StdBt,
with = 5% and = 40%. The current stock price is S0 = $200. The continuously compounded riskfree rate is r = 10%.
Consider an American call option with strike price $250 and one-year maturity.
(a): construct a two-step binomial tree to calculate the stock price dynamics, with each step being six-month.
(b): Use your constructed binomial tree in part (a) to price the American call option with strike price $250 and one-year maturity.
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