You will consider puts and calls on a share with spot price of $30. Strike price is
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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 risk-neutral valuation.
b) 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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