Question 4 An asset is currently priced at 95p, and its annual volatility is 25%. The continuous risk-free interest rate is 5% per year. You wish to compute the values of a call and a put option on the underlying asset, both with an exercise price of 85p and maturity of 6 months. You are asked to perform the following tasks: - Page 3 of 4 - a) Construct a three-equal-step binomial framework for stock prices (20% weighting) b) Calculate the European call option value at origination (20% weighting) c) Calculate that the European put option value at origination (20% weighting) d) Demonstrate whether this European call and put option values satisfy the put-call option parity relationship. (20% weighting) e) Consider an American put option with an exercise price of 85p and maturity of 6 months. Calculate the value of the American put option at origination. Explain why the value of the American put option differs from the European put option with the same exercise and maturity. (20% weighting) (Total 100% weighting) Question 4 An asset is currently priced at 95p, and its annual volatility is 25%. The continuous risk-free interest rate is 5% per year. You wish to compute the values of a call and a put option on the underlying asset, both with an exercise price of 85p and maturity of 6 months. You are asked to perform the following tasks: - Page 3 of 4 - a) Construct a three-equal-step binomial framework for stock prices (20% weighting) b) Calculate the European call option value at origination (20% weighting) c) Calculate that the European put option value at origination (20% weighting) d) Demonstrate whether this European call and put option values satisfy the put-call option parity relationship. (20% weighting) e) Consider an American put option with an exercise price of 85p and maturity of 6 months. Calculate the value of the American put option at origination. Explain why the value of the American put option differs from the European put option with the same exercise and maturity. (20% weighting) (Total 100% weighting)