Binomial model for pricing american put options

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Reference no: EM131308962

Consider a one-period binomial model for pricing American put options with h = 1, σ = 0.3 where S = 90.

1. Use the fact that option prices are nonnegative and the put-call parity to show that there is no early exercise if r = 0 and δ = 0.08 for any given strike K.

2. For K = 90, 100, 110, 120, 130, 140, 150 if r = 0.08 and δ = 0.08. Find the smallest strike where there is early exercise, and prove that for any strike greater than that strike there will always be early exercise.

Reference no: EM131308962

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