Q3) Related to Unit 2 (20 marks) Suppose we record values over three periods of time with the following parameters: - initial stock value Se = $26 - the market upswing u=1.25 - the market downswing d =0.75 - the strike price X = $30 - the single period interest rate r=0.015 (a) Find the value of the Knock-out Put option with down-and-out barrier of $17 at t=0. [10] (b) Briefly explain the meaning of in-the-money option and out-of-the-money option. State the payoff functions for the in-the-money option and out-of-the-money option respectively. For a Put option with the parameters above, is it in-the-money or out-of-the-money? And, How about the a Call option with the same parameters? [10] Q3) Related to Unit 2 (20 marks) Suppose we record values over three periods of time with the following parameters: - initial stock value Se = $26 - the market upswing u=1.25 - the market downswing d =0.75 - the strike price X = $30 - the single period interest rate r=0.015 (a) Find the value of the Knock-out Put option with down-and-out barrier of $17 at t=0. [10] (b) Briefly explain the meaning of in-the-money option and out-of-the-money option. State the payoff functions for the in-the-money option and out-of-the-money option respectively. For a Put option with the parameters above, is it in-the-money or out-of-the-money? And, How about the a Call option with the same parameters? [10]