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2. Westfarmers Limited (WES) is an Australian company with diverse holdings, including retail, industry, etc.. It is Australia's largest private employer. Currently i.e., t=0), WES
2. Westfarmers Limited (WES) is an Australian company with diverse holdings, including retail, industry, etc.. It is Australia's largest private employer. Currently i.e., t=0), WES shares are trading at $39.21. You wish to purchase a European put on WES shares, with strike price $40.00, expiring after two time steps. Consider a two-step binomial model, with variable returns: R(0,0) = 1.03, R(1, 1) = 1.02 and R(1,0) = 1.04. Using CRR notation, assume u = 1.13 and d=1/u. (a) Calculate the risk neutral probabilities (0,0), (1,1) and 7(1,0) (if you wish, you may present these results in a binomial pricing tree). (b) Construct a two-step binomial pricing tree for the European put. (c) A European call has the same strike price, underlying asset and time to expiry as the European put. Construct a two-step binomial pricing tree for the European call. (d) Construct the two-step binomial pricing tree for the present value of the strike, that is, find all PV(n,j) (K) in the two-step model. When we have variable interest rates, the present values of the strike at different nodes can be calculated using the generalised binomial pricing formula
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