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ABC s stock price is $ 9 0 . The stock price will either increase 1 0 % or decrease 8 % in the first

ABCs stock price is $90. The stock price will either increase 10% or decrease 8% in the first month. If the
price increases in the first month, it will go up by $12 or down by $15 in the second month. If the price
decreases in the first year, it will go up by $16 or down by $22 in the second month. The monthly risk-
free interest rate is 3% in the first month and 5% in the second month.
a) Using the replicating portfolio approach, calculate the value of a 2-month ATM put option.
b) Using the risk neutral probability approach, calculate the value of a 2-month call option with a strike
price of $92.

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