EU vs American Put option decrease, increase, because, current, option

AndyNZ

Consider a two-period binomial model. The current stock prices is $50 and in each of the next 2 years, the stock price can increase or decrease by 20%. Assume risk free is 5.1%. Suppose that the prices of a European put struck at $52 at each node are given by P0=4.1923; Pd=9.4636; Pu=1.4147; Puu=0; Pud=4 and Pdd=20. Then, at time zero (P0), what is the price of an American Put struck at $52?

a) 4.19
b) 4.77
c) 5.09
d) 6.01
e) None of the above.

It is clear that it cannot be 4.19 because the price of an American style put has to be higher than the European Put.

profil

nvm



Edited 1 time(s). Last edit at Thursday, March 10, 2011 at 08:37PM by passme.