Repeat Problem 11.4, only set
= 0 and
= 0.08. What is the lowest strike price (if there is one) at which early exercise will occur? If early exercise never occurs, explain why not.
For the following problems, note that the BinomCall and BinomPut functions are array functions that return the option delta (
) as well as the price. If you know
, you can compute
as
.
Problem 11.4
Consider a one-period binomial model with
= 1, where
= $100,
= 0.08,
= 30%, and
= 0. Compute American put option prices for
= $100, $110, $120, and $130.
a. At which strike(s) does early exercise occur?
b. Use put-call parity to explain why early exercise does not occur at the other strikes.
c. Use put-call parity to explain why early exercise is sure to occur for all strikes greater than that in your answer to (a).