1. What is the formula for the delta of the option as a function of (S0, U, D, R, VU, VD)?

Consider a call option for an asset with the following parameters Current spot price is $50 Option expires in 12 months Each month the asset could increase in value by 3% or decrease in value by inverse The risk free rate is 25 basis points per month S0 = $50, T=12, U=1.03, D=1/1.03, R=1.0025

2. Determine the terminal distribution of the asset price (hint: use binom.dist function in excel)

3. Describe the distribution (mean, standard deviation, shape, ).

4. Use the distribution to calculate the premium of a call with strike $55 (10% otm) expiring in 12 months

5. Explain the premium in terms of what you expect to receive for selling and what you expect to spend for purchasing (all on a discounted basis).

6. What is the premium of a put with the same strike and time to expiration?

7. What is the 12-month forward price?