Problem bank

Problem 218 of 333MediumFinanceP218

American put on a two-period tree

  1. A stock at S0=100S_0 = 100 moves up by a factor u=1.2u = 1.2 or down by d=0.9d = 0.9 each period, and the interest rate is r=5%r = 5\% per period. Price a two-period American put with strike K=105K = 105. At which nodes is it optimal to exercise early? Compare with the European put.