Question

Create a four-period binominal price tree and find the fair value of an European call and put options and an American put option on a nondividend-paying stock if the initial stock price is 82 PLN, the strike price of 80 PLN is expiring at the end of the fourth month, the compound risk-free interest rate is 12% per annum, and  σ= 0.1 .

Answer 1

Four-period binominal price tree:

1. European option call FV= 5.42

2. European option put FV= 0.328

3. American option put FV= 0.4045