Reference no: EM132651196
Problem: Option Valuation
Spot Price: 66
Strike Price: 68
Based on this spot price and this strike price as well as the fact that the risk-free interest rate is 6% per annum with continuous compounding, please undertake option valuations and answer related questions according to following instructions:
Binomial trees:
Additionally, 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%.
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.
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