Use two-step binomial tree to derive

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1. Over the past five years, the returns to Osage Manufacturing stock has been: -12 percent, 8 percent, 15 percent, 17 percent, and 6 percent. What is the arithmetic average?

2. A unit of currency is currently worth $2.00 and has a volatility of 15%. The domestic and foreign risk-free interest rates are 5% and 1%, respectively. Both rates are continuously compounded. Use a two-step binomial tree to derive a) the value of an American six-month put option with a strike price of $2.05, and b) the portfolio which will hedge a short position in the European put option today.

Reference no: EM132061168

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