2. A call is traded where the share price is $39. Every two months the action changes from price, and is known to go up 3.5% or down 1.5% or have a volatility of =.12. If the rate remains free annual risk of 3.5%, calculate the following: a) What is the fair price of the European call (using binomial trees) if the strike price at six months is $41 per share? Consider a 2-period binomial tree (3 months for each period). Use the risk-neutral probability method.

b) What is the fair price of the European put if the six-month strike price is $45 per share? [use the B&S formula]

c) If the underlying increases its value by 3%, determine the approximate change that the put can have previous. Calculate the expected price of the put using the delta approximation and the delta-gamma.