Q6

A stock price is currently AUD 180. Over each of the next two three-month periods the stock price is expected to go up by 10% or down by 10%. The risk-free interest rate is 2% per annum with continuous compounding. a) Use a two-step binomial tree to determine the value of a six-month American call option with a strike price of AUD 180? Will the option be early exercised? (2 marks) b) Use a two-step binomial to determine the value of a six-month American put option with a strike price of AUD 180? Will the option be early exercised? (2 marks) c) Does the put-call parity also hold for the call and put options in questions A and B? Why? (1 mark)