1) Black-Scholes-Merton and binomial tree

Consider a six-month European call option on a non-dividend-paying stock. The

stock price is $30, the strike price is $29, and the continuously compounded risk-free

interest rate is 6% per annum. The volatility of the stock is 20% per annum.

a) Value this option using the Black-Scholes formula. Illustrate each step in your

calculation.

b) Please use a one-step binomial tree to value this option.

c) Please use a two-step binomial tree to value this option.

d) Compare the results from b) to c) with what you get using the Black-ScholesMerton

formula.