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Chartered Financial Analyst Level 2

Chartered Financial Analyst Level 2

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6. Using the two-period binomial model, an analyst estimates the value of an American-style put option on a stock that pays no dividend. The current stock price is €65, and the put option exercise price is €63. The up factor (u) is 1.20, and the down factor (d) is 0.85. The risk-free rate of return is 5% per period. The binomial tree analysis for a European-style put option is shown in the exhibit below.

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