A stock price is currently $100. Over each of the next two six-month periods, it will either increase by 19% or decrease by 11%. The risk-free interest rate is 6% per annum with continuous compounding.

1) To use the 2-step binomial tree model to calculate a option price on the stock, calculate p (the risk-neutral probability) for each step (a six-month period).

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Marked out of 3.00

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2) What is the value of a one-year European call option with a strike price of $100? Use no-arbitrage arguments

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Marked out of 3.00

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3) What is the value of a one-year American put option with a strike price of $102? Use no-arbitrage arguments and the two-step binomial model.

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