Spot price-16

Strike price-18

Based on this spot price and this strike price as well as the fact that the risk-free interest rate is 6% per annum with continuous compounding, please undertake option valuations and answer related questions according to following instructions

a. Use a two-step binomial tree to calculate the value of an eight-month European put option using risk-neutral valuation. [1 mark]

b. Verify whether the no-arbitrage approach and the risk-neutral valuation lead to the same results. [1 mark]

c. Use a two-step binomial tree to calculate the value of an eight-month American put option. [1 mark]

d. Calculate the deltas of the European put and the European call at the different nodes of the binomial three. [1 mark]

Note: When you use no-arbitrage arguments, you need to show in detail how to set up the riskless portfolios at the different nodes of the binomial tree