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A stock is currently selling for $50. The stock price could go up by 10 percent...

A stock is currently selling for $50. The stock price could go up by 10 percent or fall by 5 percent each month. The monthly risk-free interest rate is 1 percent. Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method.)

A. $5.10

B. $3.96

C. $4.78

D. $1.19

Why is it A

Solutions

Expert Solution

where interest rate = monthly rate*12 = 1*12 = 12%

Time period t in years = 1/no. of months in a year = 1/12 = 0.08333

jeff jeffy answered 2 years ago
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