Suppose that Stock XYZ is currently trading at $50 and does not pay any dividends. Using a binomial tree with two periods, we would like to price of an American call option with a strike price of $52 and a maturity of six months. Assume that annual continuously compounded interest rate is 5% and the volatility of the stock is 20% per year.
a. Find the binomial tree parameters u,d,p and (1 − p).
b. Draw the binomial tree for the stock price.
c. Draw the binomial tree for the call option and find the value of the call option.