Consider puts and calls on a share with spot price of $60. Strike price is $64. The riskfree interest rate is 5% per annum with continuous compound Furthermore, assume that over each of the next two two-month periods, the share price is expected to go up by 6% or down by 6%.

a. Use a two-step binomial tree to calculate the value of a four-month European call option using the no-arbitrage approach. [3 marks]

b. Use a two-step binomial tree to calculate the value of a four-month European put option using the no-arbitrage approach. [3 marks]

c. Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b. [1 mark]

d. Use a two step-binomial tree to calculate the value of a four-month European call option using risk-neutral valuation. [1 mark]

e. Use a two step-binomial tree to calculate the value of a four-month European put option using risk-neutral valuation. [1 mark]

f. Verify whether the no-arbitrage approach and the risk-neutral valuations lead to the same results. [1 mark]

g. Use a two-step binomial tree to calculate the value of a four-month American put option. [1 mark]

h. Without calculations: What is the value of a four-month American call option with a strike price of $64? Why? [2 marks]