Spot Price = $46

Strike Price = $48

Risk-free-Rate = 6% pa continuous compounding

Binomial trees:

Additionally, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%.

a.Use a two-step binomial tree to calculate the value of an eight-month European call option using the no-arbitrage approach.

b.Use a two-step binomial tree to calculate the value of an eight-month European put option using the no-arbitrage approach.

c.Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b.

d.Use a two-step binomial tree to calculate the value of an eight-month European call option using risk-neutral valuation.

e.Use a two-step binomial tree to calculate the value of an eight-month European put option using risk-neutral valuation.

f.Verify whether the no-arbitrage approach and the risk-neutral valuation lead to the same results.

g.Use a two-step binomial tree to calculate the value of an eight-month American put option.

h.Calculate the deltas of the European put and the European call at the different nodes of the binomial three.