The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected...

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The shares of XYZ Inc. are currently selling for $120 per share.The shares are expected to go up by 10 percent or down by 5 percentin each of the following two months (Month 1 and Month 2). XYZ Inc.is also expected to pay a dividend yield of 2 percent at the end ofMonth 1. The risk-free rate is 0.5 percent per month.
a. What is the value of an American call option on XYZ shares, with anexercise price of $125 and two months to expiration? Use thebinomial model to obtain the answer.

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Upward price movement factoru11 downward price movement factor d15095 Interest factor 1005 Upward price movement probability 1005095110953667 Downward price See Answer

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The shares of XYZ Inc. are currently selling for $120 per share.The shares are expected to go up by 10 percent or down by 5 percentin each of the following two months (Month 1 and Month 2). XYZ Inc.is also expected to pay a dividend yield of 2 percent at the end ofMonth 1. The risk-free rate is 0.5 percent per month.a. What is the value of an American call option on XYZ shares, with anexercise price of $125 and two months to expiration? Use thebinomial model to obtain the answer.