u = e^(0.18*0.5^(1/2)) = 1.1357
d = 1/u = 1/1.1357 = 0.8805
p = [e^(0.04-0.025)*0.5 - 0.8805]/[1.1357-0.8805] = 0.4977
The tree is shown below in the attached image. The option is exercised at the lower node at the six month point. The worth is 78.41
A stock index is currently 1 ,500. Its volatility is 18%. The risk-free rate is 4%...
A stock index is currently 990, the risk free rate is 5%, and the dividend yield on the index is 2%. Use a three step to value and 18-month American put option with a strike price of 1000 when the volatility is 20% per annum. What position in the stock is initially necessary to hedge the risk of the put option?
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