Question

Consider a put option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free rate is 5%, the volatility is 25% per annum, and the time to maturity is four months.

1. Use a 2-period binomial model to price this same option.
2. Use Black-Scholes formula to value this option
3. How much the European call option on this stock with the same strike (E) and time to maturity (T) will cost?
4. How much the American call with the same E and T will cost?

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Answer 1

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

Standard deviation		25.00%
Time of each period (months)		2
u= e^(Standard deviation)*( Time each period/12)0.5
u=	1.1075
d=1/u=	0.9030

A.

B.

C, D.