Each of the following questions should be answered by building a 15-period binomial model whose parameters should be calibrated to a Black-Scholes geometric Brownian motion model with: T =.25 years, S0 =100, r=2%, =30% and a dividend yield of c=1%. Your binomial model should use a value of u = 1.0395 and d = 1/u = 0.96201. (This has been rounded to four decimal places but you should not do any rounding in your spreadsheet calculations.)

1. Compute the price of an American call option with strike K = 110 and maturity T = .25 years.

2. Compute the price of an American put option with strike K = 110 and maturity T = .25 years.

3. Is it ever optimal to early exercise the put option of Question 2?

4. If your answer to Question 3 is Yes, when is the earliest period at which it might be optimal to early exercise? (If your answer to Question 3 is No, then you should submit an answer of 15 since exercising after 15 periods is not an early exercise.)

5. Do the call and put option prices of Questions 1 and 2 satisfy put-call parity?