This is an example of a program that creates a binomial tree to price a standard European put and an American put (assuming it can be exercised only in the last quarter of the option's life).
For this project, we have:
- Inputs: S (stock price at time = 0), X (strike price), s (annual volatility), t (maturity), n (the number of periods, a multiple of 4), d (continuous annualized dividend yield), and r (interest rate).
- Output: Both European put's and Amercian put's value.
In MatLab, just run the given file.
Suppose S = 100, X = 95, s = 0.4, t = 1, n = 1000, d = 0.02, and r = 0.06.
- The European option price is about 10.9611.
- The American option price is about 11.2128.
