A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.

Question

Shannon

Business

5 March, 07:55

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.

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Dahlia Jacobson · Answer 1

0.4977

Explanation:

U = e 0.18*0.5 = 1.1357

D=1/u

D=1/1.1357

=0.8805

P=e (0.04-0.025) * 0.5 - 0.8805 / 1.1357-0.8805

=0.4977

Therefore the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree will be 0.4977