Question

non-dividend-paying stock sells for $110.00, and the continuously compounded interest rate is 10% per annum. There are 6-month European calls and put options on the stock with a strike price of $105.00. The volatility of the stock price is 35%.

Use the two-step binomial model to find European put option. Answers: Hint: u= ? ? √∆? and d= ? − ? √∆�

Find (1-p):

Su:

Sd:

Suu:

Sud

Sdd:

At t= 0.5: Find Puu ,

At t=0.25: Find Pu, Pd

At t=0: Find the European put option price P:

Answer 1

u = e^(std dev*(t)^(1/2))

=e^(0,35*(0,25)^(1/2))

=1,1912

d = 1/u

=1/1,1912

=0,8395