2-16 The shares of Echo Corporation are currently selling for $125 a share. The shares are expected to go up by 25% in each of the following two months (Month 1 and Month 2). Echo Corp. is not...

2-16

The shares of Echo Corporation are currently selling for $125 a share. The shares are expected to go up by 25% in each of the following two months (Month 1 and Month 2). Echo Corp. is not expected to pay any dividend over the next two months. The risk free rate is .25% per month.

We are interested in using the binomial moddel to calculate the price of a European put option on Echo's shares, with an exercise price of $130. We will assume a recombining binomial tree.

What is the down factor

Extracted text: The formula to calculate the discount factor (DF) is as follows: DF = 1 (1+r)" Where, DF: Discount factor r: Discount rate n: No. of years