Draw the tree indicating price of an american call option

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Reference no: EM13262638

Consider an at the monry call option where the stock price is $40 which expires in 3 months. Suppose the underlying stock has an annualized volatility of $\sigma = .3$ rate is r= 0.10.

A. Suppose the call is a European option which we would like to price using the binomial pricing model with 3 subperiods. Calculate u, d, p, and the time step, T.

B. Draw a tree indicating the stock price and European option value at each node. Clearly indicate the current price of the option.

C. Draw the tree indicating the price of an American call option at each node. Indicate the nodes where it is optimal to excercise the option early.

Reference no: EM13262638

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