Question 9c:

The price of a stock is currently 90. You est. that the annual volatility is 40%. There is no dividend paid. The risk-free interest rate is 6% per annum with continuous compounding. You are interested in a one-year call option on this stock with strike price 80.

(i) Calculate the u, d, and p parameters of a one-period binomial model. Use 2- decimal precision. Explain your answer. (ii) Determine the option premium using a one-period binomial model. Explain. (iii) Determine the option premium using a two-period binomial model. Explain. (iv) Determine the option premium using the Black-Scholes-Merton model. Explain. (v) Discuss and compare answers to (ii), (iii) and (iv). Relate answer to the no-arbitrage value of the option.