Question
In: Finance
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 agoRelated Solutions
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