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Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of The stock is .6 8 initially and can rise
Exercise 5.2. Consider a one-step market consisting of a bond and a stock. The price of The stock is .6 8 initially and can rise or fall by .8 1 at each time step. The bond has interest rate r = 5%. i. Calculate the price of a European call option on this stock with a strike price of 7.50. ii. Now consider a two-step market with the stock price rising or falling by .61 at each step. Calculate the price of this European call option at time 0. Will the risk-neutral probabilities at both steps be the same? Why? It would be helpful to draw a tree
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