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Value of a six-month european call option

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Problem 1: A stock price is currently $60. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $61?

Problem 2: For the situation considered in previous problem, what is the value of a six-month European put option with a strike price of $61? Verify that the European call and European put prices satisfy put-call parity. If the put option were American, would it ever be optimal to exercise it early at any of the nodes on the tree?

Reference no: EM132816041

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