Consider a stock that follows Geometric Brownian Motion : d ln(St) = dt + dBt

The initial stock price S0 is $72. The expected log return is 12%. The volatility is 25%.The continuously-compounded riskfree rate r is 8%. Consider an European call option on this stock that has an expiration date 5 months from now and a strike price of $69

a) Determine the price of this call option using five-period binomial tree. Hint: choose u, d, p, and R using formulas in week 2s lecture note. (b) Calculate the Delta values at each node of the first three periods.

(c) Calculate the value of the same European call option c using Black-Scholes call option valuation formula. (d) Use the Black-Scholes formula to calculate the price of a European put option with the same maturity of 5 months and the same strike price of $69. (e) Numerically verify the put-call parity for this pair of call and put option