Value of a derivative that pays off

Reference no: EM13142294

A stock price is currently $30. During each 2-month periods for the next 4 months it will increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step binomial tree to calculate the value of a derivative that pays off max[(30-ST), 0]2 , where ST is the stock price in 4 months. If the derivative is American-style, should it be exercised early?

Reference no: EM13142294

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