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For a three-period binomial model for modeling the price of a stock, you are given: The...

For a three-period binomial model for modeling the price of a stock, you are given:

  1. The current price of the stock is 125.
  2. The length of each period is one year.
  3. u = 1.2, where u is one plus the rate of capital gain on the stock if the price goes up.
  4. d = 0.8, where d is one plus the rate of capital loss on the stock if the price goes down.
  5. The continuously compounded risk-free interest rate is 6%.
  6. The price of a three-year $90-strike European put option is $0.89.

Calculate the price of a three-year $100-strike European put option.

  1. 1.23

  2. 1.49

  3. 1.78

  4. 2.01

  5. 2.48

Please provide full explanation

Solutions

Expert Solution

I have solved the question below:

Price of put option is 2.019.

Option 4 is correct.

Please let me know in case you have any queries, I would be happy in assisting you.

jeff jeffy answered 1 year ago
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