Question 4: One-Step and Two-Step Binomial Trees for Option Pricing (4/10) Shares in XYZ Corporation sell today for $20. The risk-free rate is 3% (continuously compounded). In the next six months. XYZ shares will either increase in price by 30%, or decrease in price by 40%. In the following six months, XYZ shares will again either increase in price by 30%, or decrease in price by 40%. XYZ pays no dividends. One-Step Binomial Tree (1) What is the price of a European call with strike price $19 and expiration in 6 months? Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating method (2) What is the price of a European put with strike price $19 and expiration in 6 months? method, and verify that put-call parity holds, together with your solution for (1) (3) If the put of part (2) currently trades for $1, is there an arbitrage If so, describe one. Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating If not, why not? . Two-Step Binomial Tree (4) What is the price of a European call with strike price S19 and expiration in 1 year? Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating method. (5) What is the price of a European put with strike price $19 and expiration in 1 year? Calculate the price explicitly using a binomial tree and the dynamic hedging/replicating method, and verify that put-call parity holds, together with your solution for (4) Risk-Neutral Pricing (6) Calculate the risk-neutral probabilities. (7) Write out the risk-neutral pricing formula for the 6-month call option and put option in (1) and (2). Verify the result risk-neutral pricing method is the same as in (1) and (8) Write out the risk-neutral pricing formula for the 1-year call option and put option in (4) and (5. Verify the result risk-neutral pricing method is the same as in (4) and