A non-dividend paying stock price is currently $50. Its 1-year expected volatility is 14.3% and the risk-free interest rate is 10% per annum (compounded continuously). a) Use a 1-step binomial tree to find the value of a two-month European call option with a strike price of $49?

b) Using the BSM model what is the value of a 2-month European call option on the stock with a strike price of $49? Use the cumulative distribution table, provided in the appendix, or the =NORM.S.DIST function in Excel to solve (1) and (2). See end of appendix for examples of how to use the table.

c) What is the value of a 2-month European put option on the stock with a strike price of $49?

d) All else being equal, what happens to the value of a 2-month European call option if the underlying stock price increases by $1?