Divide the life of the option into four 3 month periods

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Use the binomial tree in Problem to value a security that pays off x2 in 1 year where x is the price of copper.

Problem :
The spot price of copper is $0.60 per pound. Suppose that the futures prices (dollars per pound) are as follows:

The volatility of the price of copper is 40% per annum and the risk-free rate is 6% perannum. Use a binomial tree to value an American call option on copper with an exercise price of $0.60 and a time to maturity of 1 year. Divide the life of the option into four 3-month periods for the purposes of constructing the tree.

Reference no: EM131239482

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