1. A stock price is currently $40. In 6 months, the stock price will either be $42.4 or 37. If in 6 months the stock price is $32.4, the stock price will either be $45 or $396 months after then. If in 6 months the stock price is $37, the stock price will either be $39 or $34.3 6 months after then. The risk-free interest rate is 6%. There is a derivative on the market which allows the owner to sell the underlying stock for $40 at any time over the next 12 months. We assume there is no arbitrage in the market. I (a) Briefly compare and contrast American and Asian style options. Which style is the option described in this question? 1 (b) Use a two-step binomial tree to find the price of this derivative. I (c) Your friend John thinks is an 90% chance that the stock price will be $34.3 in 6 months. Does this information change your answer to (b)? Why or why not? I 1. A stock price is currently $40. In 6 months, the stock price will either be $42.4 or 37. If in 6 months the stock price is $32.4, the stock price will either be $45 or $396 months after then. If in 6 months the stock price is $37, the stock price will either be $39 or $34.3 6 months after then. The risk-free interest rate is 6%. There is a derivative on the market which allows the owner to sell the underlying stock for $40 at any time over the next 12 months. We assume there is no arbitrage in the market. I (a) Briefly compare and contrast American and Asian style options. Which style is the option described in this question? 1 (b) Use a two-step binomial tree to find the price of this derivative. I (c) Your friend John thinks is an 90% chance that the stock price will be $34.3 in 6 months. Does this information change your answer to (b)? Why or why not