For Problem 1 and 2, assume the following model for a stock. The current stock price is 60 dollars. The stock pays no dividends. The volatility is 25%. The continuous compound interest rate is 8%. Problem 2. Use the Binomial model with 3 time periods to find the price of a Geometric Average Strike Put option that expires in 18 months. Note: The average is based on a geometric average. See Remark at the bottom. We do not include the price today when calculating the average. Remark: There are two types of averages: Arithmetic average and geometric average. The examples we saw in class are based on the arithmetic average. Consider a stock whose price today is 45 dollars. Suppose the prices over the next 4 time periods are 50, 52, 56, and 60 dollars. What is the average over the 4 time periods? We do not include 45 when we calculate the average. The average using arithmetic average is (1/4) > (50 +52 +56 +60) = 54.50. The average using geometric average is (50 x 52 x 56 x 60)1/4 = 54.3660971. For Problem 1 and 2, assume the following model for a stock. The current stock price is 60 dollars. The stock pays no dividends. The volatility is 25%. The continuous compound interest rate is 8%. Problem 2. Use the Binomial model with 3 time periods to find the price of a Geometric Average Strike Put option that expires in 18 months. Note: The average is based on a geometric average. See Remark at the bottom. We do not include the price today when calculating the average. Remark: There are two types of averages: Arithmetic average and geometric average. The examples we saw in class are based on the arithmetic average. Consider a stock whose price today is 45 dollars. Suppose the prices over the next 4 time periods are 50, 52, 56, and 60 dollars. What is the average over the 4 time periods? We do not include 45 when we calculate the average. The average using arithmetic average is (1/4) > (50 +52 +56 +60) = 54.50. The average using geometric average is (50 x 52 x 56 x 60)1/4 = 54.3660971