1. You are asked to price options on Google stock. You find that the current price of the stock is $2870 per share. Your client has very strong beliefs about the possible changes in Google stock over the next 3 months: she believes that there is either a 60% chance of a change of 8% (up factor = 1.08) or a 40% chance of a change of -3% (down factor 0.97). She doesnt believe that any other outcomes are possible over the next 3 months.

Google does not pay any dividends. Three-month risk-free bonds have an annualized rate of return of 2%, compounded continuously.

Use binomial models to price call options with the following strike prices:

1. K = 2800

2. K = 3025

2. (continuation of question 1) Use your prices from question 1 and put-call parity to find the value of the following put options on Google stock that expire in the next 3 months. Assume that both the call and put options are European.

1. K = 2800

2. K = 3025

3. (continuation of question 1) Use your prices from question 1 and put-call parity to find the possible range of values of the following put options on Google stock that expire in the next 3 months. Assume that both the call and put options are American.

1. K = 2800

2. K = 3025