1 Binomial Trees Use the binomial tree technique to solve these two problems: 1. A stock trades at a price of $22, and will pay a dividend of $2 in 5 months time. The stock has a volatility of 20%, and interest rates are 1% (with continuous compounding). Price a six month American call option with strike price $22. Use a two step tree, with three month time steps. 2. You are in the Republic of Ireland. Price a one year American put option on GBP1.00 with strike EUR 1.06. The EUR/GBP exchange rate's volatility is 25%. Interest rates in the Eurozone are 0.1%, while in Britain, they are 0.7% (both with continuous compounding). The current exchange rate is GBP1 = EUR1.11. Use a two step tree, with six month time steps. 1 Binomial Trees Use the binomial tree technique to solve these two problems: 1. A stock trades at a price of $22, and will pay a dividend of $2 in 5 months time. The stock has a volatility of 20%, and interest rates are 1% (with continuous compounding). Price a six month American call option with strike price $22. Use a two step tree, with three month time steps. 2. You are in the Republic of Ireland. Price a one year American put option on GBP1.00 with strike EUR 1.06. The EUR/GBP exchange rate's volatility is 25%. Interest rates in the Eurozone are 0.1%, while in Britain, they are 0.7% (both with continuous compounding). The current exchange rate is GBP1 = EUR1.11. Use a two step tree, with six month time steps