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12 March, 21:52

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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  1. 12 March, 22:27
    0
    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
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