Actuarial Math/ Financial Math Problem: Binomial Tree Pricing Model

rate a = . = Problem 2 (Required, 25 marks) The current price of an asset is $35. The asset pays dividends continuously at an annual dividend yield 3%. You are given that The asset price in the coming year is simulated by single period binomial tree model with u = 1.05 and d 0.9. (*Note: Here, the parameters u and d have been adjusted to reflect the effect of dividend.) The annual riskfree interest rate is 4% convertible continuously. Questions (a) Calculate the price of a 1-year at-the-money European put options on this asset using no arbitrage pricing principle. (b) Suppose that the market price of a 1-year at-the-money European put options on this asset is $0.78, identify an arbitrage opportunity. . rate a = . = Problem 2 (Required, 25 marks) The current price of an asset is $35. The asset pays dividends continuously at an annual dividend yield 3%. You are given that The asset price in the coming year is simulated by single period binomial tree model with u = 1.05 and d 0.9. (*Note: Here, the parameters u and d have been adjusted to reflect the effect of dividend.) The annual riskfree interest rate is 4% convertible continuously. Questions (a) Calculate the price of a 1-year at-the-money European put options on this asset using no arbitrage pricing principle. (b) Suppose that the market price of a 1-year at-the-money European put options on this asset is $0.78, identify an arbitrage opportunity