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Part 2 (10 marks) Binomial Pricing Suppose that the risk-free rate is 6% p.a. compounded continuously. The current price (S0) of a not-dividend paying stock

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Part 2 (10 marks) Binomial Pricing Suppose that the risk-free rate is 6% p.a. compounded continuously. The current price (S0) of a not-dividend paying stock is $30. We model the evolution of the stock prices using a 4-step Binomial tree approach. In every three-month period, u=1.1618 and d=0.8607. This is illustrated in the figure below: A double-barrier knock-in European derivative with one year to maturity is written on the stock. The lower barrier (HL)=20 and the upper barrier (HU)=35. The terminal payoff of this exotic derivative is specified as: Terminal Payoff =max(ST15,7) where SY= terminal share price. Required: Use the risk-neutral Binomial approach to caleulate the current value of the exotic derivative Use continuoun compounding for all present value calculations. Show all working. Part 2 (10 marks) Binomial Pricing Suppose that the risk-free rate is 6% p.a. compounded continuously. The current price (S0) of a not-dividend paying stock is $30. We model the evolution of the stock prices using a 4-step Binomial tree approach. In every three-month period, u=1.1618 and d=0.8607. This is illustrated in the figure below: A double-barrier knock-in European derivative with one year to maturity is written on the stock. The lower barrier (HL)=20 and the upper barrier (HU)=35. The terminal payoff of this exotic derivative is specified as: Terminal Payoff =max(ST15,7) where SY= terminal share price. Required: Use the risk-neutral Binomial approach to caleulate the current value of the exotic derivative Use continuoun compounding for all present value calculations. Show all working

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