Still need F. through H.

Use the two-state binomial option-pricing model with continuous compounding for the following questions:

S₀ = $100; X = $120; r_f = 5.5%

The stock price will either increase to $150 (u=1.5) or decrease to $80 (d=0.8).

a)What are the call option values (C_u & C_d) across the two states?

Cu = $30

Cd = $0

b) What is the delta (i.e., hedge ratio) for the call?

42.86%

c) What is the probability (Pr_u) that the underlying stock price will experience the 'u' state?

36.43%

d) Value the call using the risk-free approach.

$10.41

e) Value the call using the risk-neutral approach.

$11.62

f) Given the value of the call calculated above, what is the value of a put option, according to Put-Call Parity, with the same strike price and maturity date?

g) What are the put option values (P_u & P_d) across the two states?

Pu =

Pd =

h) What is the delta (i.e., hedge ratio) for the put?

i) What is the probability (Pr_u) that the underlying stock price will experience the 'u' state? (Same as above)

j) Value the put using the risk-free approach.

k) Value the put using the risk neutral approach.