Question

Suppose the exchange rate is $1.99/£. Let r$ = 6%, r£ = 7%, u = 1.27, d = 0.78, and T = 1. Using a 2-step binomial tree, calculate the value of a $2.10-strike European put option on the British pound.

a. $0.2671

b. $0.3235

c. $0.3435

d. $0.3333

e. $0.3282

PLEASE POST ALL THE STEPS

Answer 1

		Strike Price	2.1	1.2107	0.8893
		3.2097	fuu = 0
	2.5273
1.9900		1.9713	fud= 0.1287
	1.5522
		1.2107
			fdd = 0.8893
p = (e^rt-d)/(u-d)
e^(0.06/2) - 0.78/(1.27-0.78)
1.0305-0.78/0.49
0.2505/0.49
0.5112
fuu=0
fud=0.1287
fdd=0.8893
f = e^(-2rt)(p^2fuu + 2p(1-p)fud+(1-p)^2fdd)
e(-0.06)((0.5112^2)*0)+2(0.5112)(1-0.5112)(0.1287)+(1-0.5112)^2*0.8893
0.9418(0+0.0643+0.2125)
0.2671