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In this question, you need to price options with binomial trees. You will consider puts and calls on a share with spot price of $30. Strike price is $34. Furthermore, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%. The risk-free interest rate is 6% per annum with continuous compounding.
a. Use a two-step binomial tree to calculate the value of an eight-month European call option using the no-arbitrage approach.
b. Use a two-step binomial tree to calculate the value of an eight-month European put option using the no-arbitrage approach.
c. Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b.
d. Use a two step-binomial tree to calculate the value of an eight-month European call option using risk-neutral valuation.
e. Use a two step-binomial tree to calculate the value of an eight-month European put option using risk-neutral valuation.
f. Verify whether the no-arbitrage approach and the risk-neutral valuation lead to the same results.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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