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solution

The price of a stock is currently 100 USD. Assume the price can increase by a factor of 1.10 or fall by a factor of 0.90. The stock pays no dividends and the annual percentage rate (APR) is 2%. Consider an American put option on this stock with a strike price of 95 USD, and with two years to maturity and one-year step length. You are standing at year ?? = 0 currently.

(1) What is the price of this American put option at year ?? = 0?
(2) Suppose the strike price is 95 + ??, where ?? is the day of the month when you were born.

What is the price of this American put option at year ?? = 0?
(3) What if the interest rate is doubled? Compare your result with (1). Then, using (2) and

(3), explain how strike price and interest rate affect the put option price.

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