Explanation:
Given:
$30Step 1: Calculate u and d
Step 2: Build the binomial tree The lowest stock price occurs after two consecutive down movements:
$24.075$19.32Therefore, the stock price at the node with the lowest stock price is $19.32.
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A stock with a (continuous) dividend yield of 1.0% has a current price of $30 and volatility of 22%. We use a two-step binomial model to value a two-year European style call option on the stock; i.e., each time step is one year. The risk-free rate is 3.0%. In the binomial tree, what is the stock price at the node with the lowest stock price?
A
$14.78
B
$19.32
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