For Q1 and Q2, use the following information. A non-dividend paying stock is cur

Question

For Q1 and Q2, use the following information.

A non-dividend paying stock is currently trading at $100 and its volatility is 40%. Consider a put option on this stock, with a strike price of $110, expiring in 6 months. The current risk-free rate is 1% per annum. We will price the put option with a 3-step binomial tree (the number of steps = 3).

Q1. First, calculate the European put option price in a spreadsheet. Then use Derivagem to price it. Confirm these 2 prices match. Include the Derivagem output (screenshot or copy paste). Hint: The put pricing exercise in class was a 2-step tree. You can extend 1 more step to that example to create a 3-step tree.

Q2. Calculate the American put option price in a spreadsheet. Then use Derivagem to price it and confirm. These 2 prices must match but will be higher than Q3 answer. Include the Derivagem output.

Derivangem: Derivagem (DG) software (version 2.01), download the software from: http://www-2.rotman.utoronto. ca/~hull/software/ For Mac users, you must run Derivagem in "Excel for Mac 2011" or newer because it requires running macro, which isn't supported in the older versions of Mac Excel.

Explanation / Answer

For Q1 and Q2, use the following information. A non-dividend paying stock is cur

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