Consider an n = 1 step binomial tree with T = 1. Suppose r, the annualized risk-free rate is 8 %, and delta, the annualized dividend rate is 7 %. Also suppose the annualized standard deviation of the continuously compounded stock return, sigma, is 45 %. Suppose further that the initial stock price, S = $ 90. Compute American put option prices for K = $ 135, $ 126, $ 117, $ 108 ,$ 99, $ 90, $ 81.
a) Determine the American put premium, when K = $ 135
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b) Determine the American put premium, when K = $ 126
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c) Determine the American put premium, when K = $ 117
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d) Determine the American put premium, when K = $ 108
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e) Determine the American put premium, when K = $ 99
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e) Determine the American put premium, when K = $ 90
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e) Determine the American put premium, when K = $ 81
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You can earn partial credit on this problem.