Question

Use a three-time-step tree to value an American put option on the geometric average of the price of a non-dividend-paying stock when the stock price is $$\$ 40$$, the strike price is $$\$ 40$$, the risk-free interest rate is $10 \%$ per annum, the volatility is $35 \%$ per annum, and the time to maturity is three months. The geometric average is measured from today until the option matures.

   Use a three-time-step tree to value an American put option on the geometric average of the price of a non-dividend-paying stock when the stock price is $$\$ 40$$, the strike price is $$\$ 40$$, the risk-free interest rate is $10 \%$ per annum, the volatility is $35 \%$ per annum, and the time to maturity is three months. The geometric average is measured from today until the option matures.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 27, Problem 12

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Step 1

The time to maturity is three months, which is equivalent to 0.25 years. Since we are using a three-time-step tree, the time step size is 0.25/3 = 0.0833 years. Show more…

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Use a three-time-step tree to value an American put option on the geometric average of the price of a non-dividend-paying stock when the stock price is $$\$ 40$$, the strike price is $$\$ 40$$, the risk-free interest rate is $10 \%$ per annum, the volatility is $35 \%$ per annum, and the time to maturity is three months. The geometric average is measured from today until the option matures.

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