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A stock index is currently 1,000. Its volatility is 20%. The risk-free rate is 5% per...

A stock index is currently 1,000. Its volatility is 20%. The risk-free rate is 5% per annum

(continuously compounded) for all maturities and the dividend yield on the index is

3%. Calculate values for u, d, and p when a six-month time step is used. What is the

value a 12-month American put option with a strike price of 980 given by a two-step

binomial tree.

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Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE. THUMBS UP PLEASE.

Standard deviation 20.00%
Time of each period (months) 6
u= e^(Standard deviation)*( Time each period/12)0.5
u= 1.1519
d=1/u= 0.8681

jeff jeffy answered 2 years ago
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