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.

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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%.

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

downmove factor is =0.75.

jeff jeffy answered 1 year ago

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