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QUESTION
Let S0 = $100, K = $95, r = 8% (continuously compounded), = 30%, T = 1 year, and n = 3. Verify that the binomial option price for an American call...
- Let S0 = $100, K = $95, r = 8% (continuously compounded), σ = 30%, T = 1 year, and n = 3.
- a. Verify that the binomial option price for an American call option under the above parameters is$ 18.283. Verify that there is never early exercise; hence, a European call would have the same price.
- b. Show that the binomial option price for a European put option is $5.979. Verify that put-call parity is satisfied.
- c. Verify that the price of an American put is $6.678.
