Let S0 = $100, K = $95, r = 8% (continuously compounded), = 30%, T = 1 year, and n = 3. Verify that the binomial option price for an American call…

  1. Let S0 = $100, K = $95, r = 8% (continuously compounded), σ = 30%, T = 1 year, and n = 3.
  2. a. Verify that the binomial option price for an American call option under the above parameters is$ 18.283. Verify that there is never early exercise; hence, a European call would have the same price.
  3. b. Show that the binomial option price for a European put option is $5.979. Verify that put-call parity is satisfied.
  4. c. Verify that the price of an American put is $6.678.