Problem 1 (Change of Numeraire with Binomial Option Pricing Model) Consider the following binomial tree for 3 months. Consider a European call option on this stock, where the time-to-maturity is 3 months and the risk free rate is assumed to be constant at 5% per annum with continuous compounding. S, :320 5:280 S.:260 (a) Calculate the price of the 3-month at-the-money call option using one-step binomial option pricing model. (Hint: T=0.25, r=0.05, K=280.) (b) Calculate the price of a call option by taking the stock price as a numeraire asset. (Hint: must be a martingale under Qs measure, where B is the bond price.) (c) Discuss the results above by comparing the answers in (a) and (b). St Problem 1 (Change of Numeraire with Binomial Option Pricing Model) Consider the following binomial tree for 3 months. Consider a European call option on this stock, where the time-to-maturity is 3 months and the risk free rate is assumed to be constant at 5% per annum with continuous compounding. S, :320 5:280 S.:260 (a) Calculate the price of the 3-month at-the-money call option using one-step binomial option pricing model. (Hint: T=0.25, r=0.05, K=280.) (b) Calculate the price of a call option by taking the stock price as a numeraire asset. (Hint: must be a martingale under Qs measure, where B is the bond price.) (c) Discuss the results above by comparing the answers in (a) and (b). St