Question
Calculate the price of a 9-month American call option on corn futures when the current futures price is 198 cents, the strike price is 200 cents, the risk-free interest rate is $8 \%$ per annum, and the volatility is $30 \%$ per annum. Use a binomial tree with a time interval of 3 months.
Step 1
In this case, $r = 0.08$, $\sigma = 0.3$, and $t = 3/12$ (since the time interval is 3 months). Therefore, $u = e^{(0.08+0.3^2/2)(3/12)}$. The down factor, $d$, is calculated as $e^{(r-\sigma^2/2)t}$. Using the same values as above, $d = Show more…
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