ANSWER ALL

1. In a one-period model, the share price starts at $12 and in one year's time is either $24 or $6. Simple interest on USD is 20% per year. (a) Construct a replicating portfolio for a one year call option with strike K = $15. (b) Explain how The Law of One Price allows you to calculate the mium of the call option. (c) Construct risk-neutral probabilities for the model for the share price and verify the risk-neutral value for the call option is the same as the value given by the replicating portfolio. 1. In a one-period model, the share price starts at $12 and in one year's time is either $24 or $6. Simple interest on USD is 20% per year. (a) Construct a replicating portfolio for a one year call option with strike K = $15. (b) Explain how The Law of One Price allows you to calculate the mium of the call option. (c) Construct risk-neutral probabilities for the model for the share price and verify the risk-neutral value for the call option is the same as the value given by the replicating portfolio