MODEL 3 American Options On Stocks With Known Dividend Yields The Problem

Develop a model to estimate the price of American options (both puts and calls) on stocks with known dividend yields using a Cox, Ross, and Rubinstein (CRR)

1 Binomial Pricing of American Options on Stocks with Known Dividend Yield

5 Stock price (S)

6 Exercise price (K)

7 Interest rate (it. annual)

8 Dwkiend yield (q. annual)

9 Volatility (sig. annual)

10 Time to maturity (T, yeare)

11 Number of steps (n)

FIGURE 24.3 Model 3: Binomial pricing of American options on stocks with known dividend yield.

binomial tree. Simultaneously calculate the values of the equivalent European options. (The worksheet for this model is shown in Figure 24.3.)

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