Question

An American put option on a non-dividend-paying stock has 4 months to maturity. The exercise price is $$\$ 21$$, the stock price is $$\$ 20$$, the risk-free rate of interest is $10 \%$ per annum, and the volatility is $30 \%$ per annum. Use the explicit version of the finite difference approach to value the option. Use stock price intervals of $$\$ 4$$ and time intervals of 1 month.

   An American put option on a non-dividend-paying stock has 4 months to maturity. The exercise price is $$\$ 21$$, the stock price is $$\$ 20$$, the risk-free rate of interest is $10 \%$ per annum, and the volatility is $30 \%$ per annum. Use the explicit version of the finite difference approach to value the option. Use stock price intervals of $$\$ 4$$ and time intervals of 1 month.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 21, Problem 18

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Step 1

Since the stock price is $20 and we are using intervals of $4, we can set up the grid as follows: Stock Price: $16, 20, 24$ Time: $0, 1, 2, 3, 4$ Show more…

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An American put option on a non-dividend-paying stock has 4 months to maturity. The exercise price is $$\$ 21$$, the stock price is $$\$ 20$$, the risk-free rate of interest is $10 \%$ per annum, and the volatility is $30 \%$ per annum. Use the explicit version of the finite difference approach to value the option. Use stock price intervals of $$\$ 4$$ and time intervals of 1 month.

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