Problem bank

Problem 206 of 333MediumFinanceP206

American put on a two-step tree

  1. A stock at $100 moves up 20% or down 10% each period, for two periods. The risk-free rate is 5% per period, so one dollar grows to 1.05 in a period. Price a European put and an American put, both struck at 100 and expiring after two periods. Where, if anywhere, should the American put be exercised early?