Question 6 [27 marks). A share price is modelled via a two-period binomial model with initial stock price S = 208, up/down multiplication factors u = 7/4 and d = 1/4, and interest rate per time period r = = 4.5%. (a) Verify that the no-arbitrage assumption is valid in this model. (b) Find the risk-neutral probabilities of up and down movements in the share price. State your answers to two significant figures. (c) Find the no-arbitrage price of a European put option on the share with strike K= 190 and expiry date T = 2. State your answer to the nearest pence. (d) Suppose that the share goes up in the first time step from time 0 to time 1. Find the replicating portfolio for the put option from (c) that will be used at time 1. State your answers to three significant digits. [4] [10] [6] (e) Suppose that the share goes up in the first time step. Determine whether an American put option with strike price K 190 and expiry date T = 2 will be exercised at time t = 1. = [3] Question 6 [27 marks). A share price is modelled via a two-period binomial model with initial stock price S = 208, up/down multiplication factors u = 7/4 and d = 1/4, and interest rate per time period r = = 4.5%. (a) Verify that the no-arbitrage assumption is valid in this model. (b) Find the risk-neutral probabilities of up and down movements in the share price. State your answers to two significant figures. (c) Find the no-arbitrage price of a European put option on the share with strike K= 190 and expiry date T = 2. State your answer to the nearest pence. (d) Suppose that the share goes up in the first time step from time 0 to time 1. Find the replicating portfolio for the put option from (c) that will be used at time 1. State your answers to three significant digits. [4] [10] [6] (e) Suppose that the share goes up in the first time step. Determine whether an American put option with strike price K 190 and expiry date T = 2 will be exercised at time t = 1. = [3]