Find the price of the corresponding put option

Reference no: EM132210997

Question -

(a) Consider a random variable X with a binomial distribution with parameters 4 and 8/11. What are the possible values of X and with what probabilities does each occur? Verify that the expected value of X is 32/11, or approximately 2.91, and that the variance of X is 0.79 to two decimal places.

(b) Suppose that in each period, the cost of a security either goes up by a factor of u = 6/5 or down by a factor of d = 5/6. The risk free interest rate over the period of length T satisfies erT = 1.1. If the initial price of the security is €60, determine the no-arbitrage cost of a call option to purchase the security at the end of 4 periods for a price of €70.

(c) For the stock in (b), find the price of the corresponding put option, again with strike price €70. Verify the put-call parity formula in this case.

Reference no: EM132210997

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