Calculating option price from interest rate binomial tree

Franjey

New Member
I need help resolving the following exercise, that is computing the option price from an interest rate binomial tree:

The following interest rate binomial tree is provided:
1536019448611.png


Consider the risk-neutral probability = 1/2 (constant through all periods) and delta = 1, then:
1536019499962.png


What is the value of this option? Answer is 0.1532, but I don't know how to get there.

For reference, discount factors for i = 0, i = 1 and i = 2 are:
Z(0,1)=0.9608
Z(0,2)=0.9141
Z(0,3)=0.8659

Will appreciate help.
 
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