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The current stock price is $10. In each of the next two years, the stock price can either go up by $2 or go down
The current stock price is $10. In each of the next two years, the stock price can either go up by $2 or go down by $2. The stock pays no dividends. The one-year risk-free interest rate is 5% and will remain constant during this two-year period.
a. Using the Binomial Model of option pricing, calculate the price of a two-year call option on the stock with a strike price of $13.
b. Using Risk Neutral valuation calculate the price of two-year put option on the stock with a strike price of $7.
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