Question

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 tree to value an 18-month American put option with a strike price of 1,000 when the volatility is $20 \%$ per annum. How much does the option holder gain by being able to exercise early? When is the gain made?

   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 tree to value an 18-month American put option with a strike price of 1,000 when the volatility is $20 \%$ per annum. How much does the option holder gain by being able to exercise early? When is the gain made?

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 13, Problem 28

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Step 1

The volatility is given as 20% per annum. Since we are valuing an 18-month option, we need to adjust the volatility accordingly. The time step for each node in the tree is 6 months (18 months divided by 3 steps). Therefore, the volatility for each step is Show more…

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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 tree to value an 18-month American put option with a strike price of 1,000 when the volatility is $20 \%$ per annum. How much does the option holder gain by being able to exercise early? When is the gain made?

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