A stock price is currently $$40.$ Over each of the next two six$-$month periods, it will either increase by $16\%$ or decrease by $9\%.$ The risk$-$free

interest rate is $6\%$ per annum with continuous compounding.

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$).$

Answer:

What is the value of a one$-$year European call option with a strike price of $$40?$ Use no$-$arbitrage arguments

Answer:

What is the value of a one$-$year American put option with a strike price of $$42?$ Use no$-$arbitrage arguments and the two$-$step binomial

model.

Answer: