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2 . Suppose someone longs a $ 6 0 stock when the risk - free rate is 6 percent. The stock is held for 3
Suppose someone longs a $ stock when the riskfree rate is percent. The stock is held for months and can go up by of its value every month.
a If the investor purchased a call option with a $ strike price, solve for the call option price using the binomial pricing model. Be sure to sketch the binomial lattice. SHOW YOUR WORK.
b If the investor purchased a put option also with a $ strike price, solve for the put option price using the binomial pricing model. Be sure to sketch the binomial lattice.
c Compute the call gamma and the put gamma, using the numbers you have obtained from period two options. SHOW YOUR WORK.
d If the stock price changes in period is the options moneyness likely change from period Explain. e Use the putcall parity relationship to test the binomial pricing model. SHOW YOUR WORK.
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