Consider a non-dividend-paying stock where the spot price is $25, and its volatility is 20%, the risk-free rate is 5% per annum, the time to maturity is 6 months with two 3-month periods.

a) Calculate u, d, and the risk-neutral probability p for a two-step tree.

 

b) Value the European call option with the strike is $24 with the two-step tree and risk-neutral probability you get in a).

 

c) Implement the above process in the Python. You should insert the screenshot of Jupiter notebook here and explain code step-by-step.

 

d) Compare the results in b) and c) and explain.