The following information is provided in the context of a two period (two three-month periods) binomial option pricing model. A stock currently trades at $35 per share, and an American put option on the stock has an exercise price of $30. You believe the stock will either increase by 10% or fall by 30% during each three-month period. The one-year risk free rate is 6%.

Find the probability that the stock decreases each period. Round intermediate steps and your final answer to four decimals.

.2122

.7878

.7128

.2872

Find the value of the American put today according to the binomial option pricing model. Round intermediate steps to four decimals and your final answer to two decimals.

		1.86
		1.55
		1.64
		2.71

Suppose that the market value of the American put mentioned in the previous questions is $1.75. Which of the following strategies could you employ to earn an arbitrage return?

		Sell the market put and create a short synthetic put.
		Buy the market put and create a short synthetic put.
		Sell the market put and create a long synthetic put.
		Buy the market put and create a long synthetic put.

Use the binomial option pricing model to find the value of a European put given the same information provided in Question 2. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Suppose that the market value of the European put mentioned in the previous question is $1.40. Which of the following strategies could you employ to earn an arbitrage return? Hint: put-call parity could be useful in helping you answer this question.

		Buy the market put and create a long synthetic put.
		Buy the market put and create a short synthetic put.
		Sell the market put and create a long synthetic put.
		Sell the market put and create a short synthetic put.