SPOT PRICE=86

STRIKE PRIVE=88

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:

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. [2.5 marks]

b.Use a two-step binomial tree to calculate the value of an eight-month European put option using the no-arbitrage approach. [2.5 marks]

c.Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b. [1 mark]

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

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

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

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

h.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.