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S0 udS0
dS0 ddS0
T-2 T-1 T
Two Periods (Cont…)
100 96
80 64
T-2 T-1 T
Illustration (Cont…)
and
European Puts (Cont…)
144
120
115.2
96
100
80 76.8
64
51.2
Valuing a European Put
European Put (Cont…)
Valuing an American Put
• Therefore:
• Pd,T-1 = .625 x 8.2857 + .375 x 36
--------------------------------
1.05
= 17.7891
American Puts (Cont…)