What is the black-scholes-merton price of the european put

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Reference no: EM132210971

Question - European and American Puts - You wish to price an European put on a stock which currently trades for $100. The put expires in nine months, and has a strike of $100. The nine-month interest rate (annualized continuously compounded) is 5%. The estimated volatility of the stock is 25%. The stock pays no dividends.

(i) What is the Black-Scholes-Merton price of the European put?

(ii) What is the price of the European put according to a standard 3-step binomial tree?

(iii) Suppose the standard 3-step binomial tree is the true description of stock price movements in the real world. If the European put is trading for $6, is there an arbitrage? If not, explain why not. If so, explain in detail what your strategy is.

(iv) What is the price of the American put according to a 3-step binomial tree?

(v) Under what circumstances, if any, do you exercise the put before maturity?

Reference no: EM132210971

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