1. Let S( t)be the price of stock at time and S(0)

is the current stock price, known to all

investors. Assume that

S(t) is strictly positive for all . Consider a 2-step binomial tree

model such that S(0)

=135, =1.5, = 0.7 where and is the factor if the price increases

and decreases respectively. The interest rate is 10%.

strike price is 90

(a) Assume that this is a 2 time step binomial model for a European put option. Compute the

fair value of the put option.

(10 marks)

2 of 3 TOTAL MARKS: 50 MARKS 1. Let S(t) be the price of stock at time t and S(O) is the current stock price, known to all investors. Assume that s(t) is strictly positive for all t. Consider a 2-step binomial tree model such that S(0)=135, u=1.5, d=0.7 where uand dis the factor if the price increases and decreases respectively. The interest rate is 10%. (a) Assume that this is a 2 time step binomial model for a European put option. Compute the fair value of the put option (10 marks)