Problem 16.23.

Use a three-step tree to value an American futures put option when the futures price is
50, the life of the option is 9 months, the strike price is 50, the risk-free rate is 3%, and
the volatility is 25%.

u=1.331, d = 0.8825, and =0.4688. As the tree in Figure S16.3 shows the value of the option is
4.59

72.75
0.00
64.20
0.00
56.66 56.66
1.63 0.00
50.00 50.00
4.59 3.10
44.12 44.12
7.27 5.88
38.94
11.06
34.36
15.64

Figure S16.3: Tree for Problem 16.23