Problem 1. (10 Points) Assume that the price of the stock S follows the one-step binomial model with S(0) = $100 and S(1) gu = $105, if S goes up gd = $98, if S goes down Moreover, we have P({S(1) = 5"}) The bond prices are A(O) = $100 and A(1) = $103. We are interested in pricing a European call and a European put with strike price K = 103 and exercise time is T = 1. (a) (2 Points) Verify that there are no arbitrage opportunities in the market {S, B}. (b) (8 Points) Determine the replicating portfolios Vc and VP, where Vc, resp. Vp, is the replicating portfolio of the European call, resp. put. Problem 1. (10 Points) Assume that the price of the stock S follows the one-step binomial model with S(0) = $100 and S(1) gu = $105, if S goes up gd = $98, if S goes down Moreover, we have P({S(1) = 5"}) The bond prices are A(O) = $100 and A(1) = $103. We are interested in pricing a European call and a European put with strike price K = 103 and exercise time is T = 1. (a) (2 Points) Verify that there are no arbitrage opportunities in the market {S, B}. (b) (8 Points) Determine the replicating portfolios Vc and VP, where Vc, resp. Vp, is the replicating portfolio of the European call, resp. put