AppliedNumeric answer
Climbing a binomial tree · Part 2 of 3
A stock at $100 moves up 20% or down 20% each period. The riskless rate is 5% per period, so $1 grows to $1.05. Options have a strike of $100.
Now extend to two periods. What is a two-period European put worth?
Answer with a number. Fractions, powers and expressions like 23/6 or C(52,5) are read correctly in practice.
The worked solution is in Premium
The answer, the full working and the one idea to take away – for this and all 1,322 questions in the bank. Answer it in practice and your working is marked, with a known mistake named when you make one.
Learn the method
More option pricing models questions
- In a Cox–Ross–Rubinstein tree with monthly steps and 30% annual volatility…Foundation
- A one-period tree has u = 1.2, d = 0.85 and a growth factor R = 1.03.Foundation
- Why are binomial trees still used when a closed form exists for European options?Applied
- A stock at $100 moves by a factor of 1.2 or 0.8 each period for two periods…Applied
- Same two-period tree: $100 stock, factors 1.2 and 0.8, zero rates.Advanced
- A binomial tree with 50 steps prices an option $0.04 above the Black and Scholes value.Advanced