1a)

Let S = $55, K = $50, r = 6% (continuously compounded), d = 2%, s = 40%, T = 0.5, and n = 5. In this situation, the appropriate values of u and d are 1.13939 and 0.88471, respectively. What is the value of p*, the risk-neutral probability of an upward movement in the stock price at any node of the binomial tree?

Answers:	a. 0.5316
	b. 0.4998
	c. 0.3738
	d. 0.4146
	e. 0.4684

1b)

Let S = $65, r = 3% (continuously compounded), d = 5%, s = 30%, T = 2. In this situation, the appropriate values of u and d are 1.32313 and 0.72615, respectively. Using a 2-step binomial tree, calculate the value of a $55-strike European call option.

Answers:	a. $14.416
	b. $14.291
	c. $13.458
	d. $13.868
	e. $14.519

1c)

Let S = $40, r = 5% (continuously compounded), d = 4%, s = 20%, T = 1.5. In this situation, the appropriate values of u and d are 1.19806 and 0.84730, respectively. Using a 2-step binomial tree, calculate the value of a $30-strike American call option.

Answers:	a. $10.327
	b. $10.983
	c. $10.579
	d. $10.273
	e. $10.190

1d)

Suppose the exchange rate is $1.51/. Let r_$ = 6%, r = 7%, u = 1.34, d = 0.73, and T = 2. Using a 2-step binomial tree, calculate the value of a $1.45-strike European call option on the euro.

Answers:	a. $0.2425
	b. $0.2361
	c. $0.2151
	d. $0.2284
	e. $0.1960

1e)

Suppose the exchange rate is $1.14/C$. Let r_$ = 7%, r_C$ = 4%, u = 1.33, d = 0.79, and T = 1.5. Using a 2-step binomial tree, calculate the value of a $1.20-strike American put option on the Canadian dollar.

Answers:	a. $0.1434
	b. $0.1621
	c. $0.1823
	d. $0.1592
	e. $0.1511