Repeat Problem 11.4, only set = 0.08. What is the lowest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price? Problem 11.4...

Repeat Problem 11.4, only set

= 0.08. What is the lowest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price?

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).