Question 1 (10 Marks) Adam wants to purchase a l-year European put option on JKL shares with a strike price of $40. The current price for a JKL share is $38. Adam estimates the volatility of these shares to be 13% per annum. The risk-free continuously compounding interest rate is 6% per year. a) Construct a 3-step binomial tree showing the possible share prices over the next year. Also, clearly show the corresponding probabilities for an upward and a downward movement in the share price. [4 marks] b) Using your binomial tree from part a) and the information given above, calculate the corresponding 3-step put option tree, and clearly state the fair price of the option according to the given information. [3 marks] c) Using your answers to a) and b) and the information given above, calculate the price of a 1- year European call option on JKL shares with a strike price of $38. [3 marks) Question 1 (10 Marks) Adam wants to purchase a l-year European put option on JKL shares with a strike price of $40. The current price for a JKL share is $38. Adam estimates the volatility of these shares to be 13% per annum. The risk-free continuously compounding interest rate is 6% per year. a) Construct a 3-step binomial tree showing the possible share prices over the next year. Also, clearly show the corresponding probabilities for an upward and a downward movement in the share price. [4 marks] b) Using your binomial tree from part a) and the information given above, calculate the corresponding 3-step put option tree, and clearly state the fair price of the option according to the given information. [3 marks] c) Using your answers to a) and b) and the information given above, calculate the price of a 1- year European call option on JKL shares with a strike price of $38. [3 marks)