medium · Quantitative Finance derivatives
A stock currently trading at $100 is modeled using a two-step binomial tree over one year (Δ t = 0.5). The volatility is σ = 20% and the risk-free rate is r = 5%.
If the risk-neutral probability p is approximately 0.5539 and the up-factor u is 1.1519, what is the fair value of a one-year European put option with a strike price of $100?
- $10.72
- $4.78
- $4.67
- $5.57
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