Question

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.

Answer 1

0.4977

Step-by-step explanation:

U =e 0.18×0.5= 1.1357

D=1/u

D=1/1.1357

=0.8805

P=e(0.04-0.025)×0.5 -0.8805 /1.1357-0.8805

=0.4977

Therefore the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree will be 0.4977