Pricing American Options Dilip Madan Department of Finance Robert H. Smith School of Business American Call Options We have seen as a consequence of...

For an interest rate of r = 0.05; a volatility of 20% price an at the moneyAmerican straddle on a 4 period one year tree.

The initial stock price is 100 and the straddle pays (S - 100)^+  +  (100 - S)^+

The up and down factors are U = 1.1135 and D = 0.9116. The value of theAmerican Straddle is 16.2261. There are two exercise nodes on the tree.