Binomial trees and American options.
A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum with continuous compounding.
What is the value of a six-month European put option with a strike price of $42?
What is the value of a six-month American put option with a strike price of $42?