2. Consider an at-the-money European call option with one year left to maturity written on a non-dividend paying stock. Let todays stock price be 80 kr and the stock volatility be 30%. Furthermore let the risk free interest rate be 6%. Construct a one-year, two-step Binomial tree for the stock and calculate todays price of the European call

3. Consider again the non-dividend paying stock in exercise 2 which has a price today of 80 kr and stock volatility of 30%. Assume the risk free rate is 6% as before.

(a) Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate todays price of a European call that matures in one year with a strike price of 70 kr.

(b) Explain how the at-the-money European call and the European call with a strike price of 70 kr can be combined to create a Bear spread. Calculate the price of the Bear spread, and draw both the payoff diagram and the profit diagram.

(c) Consider yet another European derivative written on this non-dividend paying stock. This derivative will pay out 100 kr if the stock price in one years time is below 110 and zero otherwise. Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate todays price of the derivative.

The rate is in question 2

Thank you very much