Assume the current value of a stock is S0 it can either jump up by or go down by . The interest rate is r. 1. Using the replicating portfolio approach show that a put option with exercise price of S0 should have a price of 0.5(rS0)/(1+r). 2. If the formula above is correct, increasing the volatility of the stock makes options more valuable even if the expected price stays the same. Explain with words and a graph why that is the case. 3. Does increasing volatility but keeping the expected price the same make a futures contract more valuable (as in the price of the future)