Assume the following information: Exercise price (X) = $21 Risk-free rate (r) = 10% S0 = $20 U = 1.2 P = .81 It might be helpful to use the BINOMDIST command in Excel. (a) Calculate the price of a call option using the binomial tree method using 2,4 and 6 time periods. What happens as the number of time periods increases? Why? (b) Recalculate the call prices assuming p= .5 (c) What are the differences in you results? Interpret them. (d) What happens as you increase the strike price to $30? Does this fit with option theory? (e) Assume the original set of information but increase the volatility, i.e. let U=1.5 and D=.67. What happens to the price of the call option? Does this conform with option theory? (f) Calculate the value of a put option using risk-neutral probability. (g) Verify parts (f) and (g) using put-pall parity.

Question Assume the following information: Exercise price (X) = $21 Risk-free rate (r) = 10% So = $20 U = 1.2 P = .81 It might be helpful to use the BINOMDIST command in Excel. (a) Calculate the price of a call option using the binomial tree method using 2,4 and 6 time periods. What happens as the number of time periods increases? Why? (b) Recalculate the call prices assuming pr.5 (c) What are the differences in you results? Interpret them. (d) What happens as you increase the strike price to $30? Does this fit with option theory? (2) Assume the original set of information but increase the volatility, i.e. let U=1.5 and D=.67. What happens to the price of the call option? Does this conform with option theory? (f) Calculate the value of a put option using risk-neutral probability. (g) Verify parts (f) and (g) using put-pall parity. Question Assume the following information: Exercise price (X) = $21 Risk-free rate (r) = 10% So = $20 U = 1.2 P = .81 It might be helpful to use the BINOMDIST command in Excel. (a) Calculate the price of a call option using the binomial tree method using 2,4 and 6 time periods. What happens as the number of time periods increases? Why? (b) Recalculate the call prices assuming pr.5 (c) What are the differences in you results? Interpret them. (d) What happens as you increase the strike price to $30? Does this fit with option theory? (2) Assume the original set of information but increase the volatility, i.e. let U=1.5 and D=.67. What happens to the price of the call option? Does this conform with option theory? (f) Calculate the value of a put option using risk-neutral probability. (g) Verify parts (f) and (g) using put-pall parity