Let S=$32, K=$33, r=4%, σ=25%, δ=0, T=0.5 year, and n=2. a.) Find u and d. b.)...

Let S=$32, K=$33, r=4%, σ=25%, δ=0, T=0.5 year, and n=2.

a.) Find u and d.

b.) Use the risk neutral probability to find the price of a European put

c.) Use the risk neutral probability to find the price of an American put.

Expert Solution

ANSWER IN THE IMAGE. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

note: rate is taken as 4% p.a & for T= 0.5, it is 2%

as n=2 (i.e 2 period model), each period rate is 1%.

A.

As σ=25%, the up move factor (u) = 1.25

downmove factor is =0.75.

B.

C.

jeff jeffy answered 2 years ago

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