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Problem C 1 : Option Valuation and Properties of Options In this question, you need to price options with different valuation approaches and comment on
Problem C: Option Valuation and Properties of Options
In this question, you need to price options with different valuation approaches and comment on your results. You will consider puts and calls on a share with a spot price of $ Strike price is $
The riskfree interest rate is per annum with continuous compounding.
Binomial trees:
Furthermore, assume that over each of the next two threemonth periods, the share price is expected to go up by or down by
a Draw a twostep binomial tree using the template provided and populate the individual nodes with the share price values at each node.
b Use the twostep binomial tree from a to calculate the value of a sixmonth European call option using riskneutral valuation.
c Use the twostep binomial tree from a to calculate the value of a sixmonth European put option using riskneutral valuation.
d Use the twostep binomial tree from a to calculate the value of a sixmonth European call option using the noarbitrage approach.
e Use the twostep binomial tree from a to calculate the value of a sixmonth European put option using the noarbitrage approach.
f Use the twostep binomial tree from a to calculate the value of a sixmonth American put option.
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