QuestionQuestion

A stock’s price is currently $40.
Over each of the next two three-month periods it is expected to go up by 6% or down by 4% (that is, u = 1.06, d = 0.96).
The annual risk-free rate is 3%.
A six-month put option on the stock with a strike price of $42 exists.
Numbers should be precise, at least two decimal points.

(c) Assume that the put is European, and use the two-period (two-step) Binomial model and risk neutral approach to solve for the value of the put today. (10 points)

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