1. Use two-step binominal tree model to price call option value The stock price starts at $20 and in each of two time steps may go up by 10% or down by 10%. Each time step is three months long and the risk-free interest rate is 12% per annum. We consider a six-month option with a strike price of $21, and the up factor ($u$)=1.1 and down factor ($d$)=0.9.
Added by Kelly B.
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- Current stock price (S₀) = $20 - Up factor (u) = 1.1 - Down factor (d) = 0.9 - Risk-free interest rate (r) = 12% per annum = 0.12 - Time step = 3 months = 0.25 years - Strike price (K) = $21 - Option maturity = 6 months = 2 time steps Show more…
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