Suppose that there are two periods: T=0, and T=1. We consider stocks A and B. Neither of the two stocks pay any dividend. In period 0, the price of stock A is S_a_0 = 99.5, the price of stock B is S _b_0 = 94. The one-period risk-free rate in period 0 is denoted by r_0. In T=1, there are two states: "up" and "down". State "up" occurs with probability 0.6; State "down" occurs with probability 0.4. The prices of the two stocks in T=11 is given by the following table. The one-period risk-free rate in T=1 r_1 is 5%.

___ up down

s_a 110 100

s_b 100 85

Let C(100) be the price of a European call option on stock A that expires in T=2 with the strike price 100.

Let P(100) be the price of European put option on stock A that expires in T=2 with the strike price 100.

(a) Solve for r_0

(b) Calculate C(100) ? P(100)

Suppose that there are two periods: 0, and 1. We consider stocks A and B. Neither of the two stocks pay any dividend. In period 0, the price of stock A is S\"; = 99.5, the price of stock B is 33 = 94. The one-period risk-free rate in period 0 is denoted by m. In period 1, there are two states: \"up\" and \"down". State I'up" occurs with probability 0.6; State \"down\" occurs with probability 0.4. The prices of the two stocks in period 1 is given by the following table. The one-period risk-free rate in period 1 r1 is 5%. \"up" \"down?! 5'\" 110 90 S" 100 85 Let C(IOO) be the price of a European call option on stock A that expires in period 2 with the strike price 100. Let P(]00) be the price of European put option on stock A that expires in period '2 with the strike price 100. (a) Solve for LU (b) Calculate cues) P(100)