A stock is currently selling for $50. The stock price could go up by 10% or fall by 5% each month. The monthly interest rate is 1% (periodic rate). Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method)
A) $5.10
B) $3.96
C) $4.78
D) None of the above

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the American put option is $5.10. The two-stage binomial method is a numerical method for pricing options that involves creating a binomial tree of possible stock prices and then calculating the value of the option at each node of the tree. The price of the option at the root node of the tree is the current price of the option.

A Stock Is Currently Selling for $50