Discuss the concept of marginal utility.

10 Suppose that a stock price is modelled by a two-period recombining binomial model with the following parameters r = 5% p.a. = risk-free rate, continuously compounded G = 40% p.a. = volatility of stock price process So = 100 = price at time 0 u = exp(o/365") = rate of return per period of an up-step (Assume 365 days in the year for all calculations and that each period represents one day.) Let $1, $2, $3 denote the three possible share prices at the end of day 2. s, denotes the share price resulting from two up-steps, $2, the result of an up then down (or down then up) step and s, the result of two down-steps. Let the state price deflator be as follows: State Price State price deflator 51 0.81977 $2 1.00981 1.24390 (i) Calculate the state prices for the three states. (4] (ii) Evaluate the expected rate of return on the share over the two days (expressed as a daily rate). [4] (iDi) A special type of call option with a 2 day term has the following payoff function max(s -75, 0) where s