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Question 4: The short riskless interest rate is 5% per period. The two-period corn futures price is $120 today and will go up or down
Question 4: The short riskless interest rate is 5% per period. The two-period corn futures price is $120 today and will go up or down by $65 each period, with risk-neutral probabilities 1/2 and 1/2. Consider a European futures call option with an exercise price of $132 maturing two periods from now. 1. What are futures prices in the tree? 2. What are the call payoffs at maturity? 3. What is the price of the futures call option at each node in the tree? 4. Calculate the present value of the call option 5. Repeat the process assuming the option is a put option. Marks)
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