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Consider a one year American put option on 100 ounces of gold with a strike of...

Consider a one year American put option on 100 ounces of gold with a strike of $2300 per ounce. The spot price per ounce of gold is $2300 and the annual financing rate is 7% on a continuously compounded basis. Finally, gold annual volatility is 15%. In answering the question below use a binomial tree with two steps.

A. Compute u, d, as well as p for the standard binomial model.

Solutions

Expert Solution

Cox-Rox-Rubinstein has suggested following formula to calculate these factors,

where,

u = Price up factor

d = Price down factor

P = Probability

t= time in a period

= volatility

r = risk free rate

Provided,

r = 7%

= 15%

t = 0.5 years ( in one step)

jeff jeffy answered 2 years ago
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