Financial math question

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jaimai

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For all problems in this section, use the binomial tree model. Unless otherwise stated, assume no arbitrage.
A stock is currently priced at $55.00. The risk free rate is 4.6% per annum with continuous compounding. In 9 months, its price will be either $64.90 or $46.20.
(a) Using the binomial tree model, compute the price of an American call with strike price $52.78 expiring in 9 months.

(b) Now, compute the price of an American put option with strike price $52.78 expiring in 9 months.
 
jaimai said:
For all problems in this section, use the binomial tree model. Unless otherwise stated, assume no arbitrage.
A stock is currently priced at $55.00. The risk free rate is 4.6% per annum with continuous compounding. In 9 months, its price will be either $64.90 or $46.20.
(a) Using the binomial tree model, compute the price of an American call with strike price $52.78 expiring in 9 months.

(b) Now, compute the price of an American put option with strike price $52.78 expiring in 9 months.
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Please follow the rules of posting in this forum, as enunciated at:

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Please share your work/thoughts about this assignment
 
firemath said:
How many times do you post this per day, Khan?
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I post this statement at the "approval" stage to let the student know that we have seen the problem and and we are not "impressed" with recorded effort on their part.
 
I would also note that many of the terms here such as "strike price", "risk free rate", "call", and "put" are from finance, not mathematics, and must be defined if you want mathematics students or professionals to comment on this.
 
HallsofIvy said:
I would also note that many of the terms here such as "strike price", "risk free rate", "call", and "put" are from finance, not mathematics, and must be defined if you want mathematics students or professionals to comment on this.
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I spent 42 years working in finance, but none of it in trading options. So, though I am aware that European and American options do differ, I do not remember how they differ technically and would have to look it up. So we are deep into the technical weeds in one respect while ignoring another technical difference that might well be practically crucial, namely whether the prices quoted are bid or offered. So much for a vocabulary that comes from a specialized sub-field of finance.

Moreover, it is not a problem in finance at all; it is a problem in theoretical economics. The problem is unanswerable unless you know precisely the mathematical formulation of "the binomial tree model." I could make an informed guess about such a model, but, to be sure, I would probably need to use a university library rather than have a beer with a trader in options.

Terrible presentation of a problem, and no work shown at all.
 
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