Consider a call option for an asset with the following parameters:

-Current spot price is $50

-Option expires in 12 months

-Each month the asset could increase in value by 3% or decrease in value by inverse

-The risk free rate is 25 basis points per month

S₀= $50, T=12, U=1.03, D=1/1.03, R=1.0025

a. Determine the terminal distribution of the asset price (hint: use binom.dist function in excel)

b. Describe the distribution (mean, standard deviation, shape, ).

c. Use the distribution to calculate the premium of a call with strike $55 (10% otm) expiring in 12 months

d. Explain the premium in terms of what you expect to receive for selling and what you expect to spend for purchasing (all on a discounted basis).

e. What is the premium of a put with the same strike and time to expiration? 7. What is the 12-month forward price?