Consider a non-dividend paying share of a company whose price at time t is denoted by St Let at time t, ct be the price of a European call option contract and pt be the price of a European put option contract on the share with the same strike price K and maturity date T. Suppose the current price of the share is So = 1. In any year the price of the share can either increase by 10% or decrease by 10%. Suppose the continuously compounded constant annual risk-free interest rate is r, where e 1.05 (a) Determine the current price of a 2-year European call option contract on the share with strike price K 1. (b) Using put-call parity, or otherwise, determine the current price of a 2-year European put option contract on the share with strike price K 1. Consider the following two derivative strategies with the following payoffs at the end of2 years: 3 marks 2 marks Strategy A: |S2-1. (Note: rl is defined as: a if r > 0 and -x ifS 0.) Strategy B: (S2-1) (c) Determine the current prices of Strategies A and B (d) Explain the differences between the prices of Strategies A and B (e) Recalculate the current prices of Strategies A and B, if the share price could either double or halve in any single year (all other assumptions stay the same as before). [6 marks 5 marks 3 marks (f) Discuss the implications of changing the assumption of share price fluctuation on the prices of Strategies A and B, as calculated in parts (c) and (e) 3 marks