Question

A stock index is currently 990, the risk-free rate is 5%, and the dividend yield on the index is 2%. Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum. How much does the option holder gain by being able to exercise early

Answer 1

Answer:

$17.27

Explanation:

As you can see in the attachment a binomial tree is made by given values

Price of the option will be $87.51

Option buyer should exercise the option in one year at lowest mode

Option holder Gain = $253.9-$236.63

                                 = $17.27