Question 2

Lon Musky Corp. stock sells today for $100 per share, and the risk-free rate is 6% per year, continuously compounded.

Nine months from now, the price will be either $110 or $90.

1. Using the binomial approach, find the value of a European call option with an exercise price of $100.
2. Using the binomial approach, find the value of a European put option with an exercise price of $100.
3. Verify the put-call parity using the results of questions 1 and 2.