Lecture 10 Tutorial Questions - Solutions.pdf

To test whether it is worth exercising the option

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To test whether it is worth exercising the option early, we compare the value calculated for the option at each node with the payoff from immediate exercise. At node C the payoff from immediate exercise is 51 47 5 3 5   . Because this is greater than 2.8664, the option should be exercised at this node. The option should not be exercised at either node A or node B. Figure S12.2 Tree for Problem 12.12
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