Suppose that S = $100, K = $100, r = 0.08, = 0.30, = 0,

Question:

Suppose that S = $100, K = $100, r = 0.08, σ = 0.30, δ = 0, and T = 1. Construct a standard two-period binomial stock price tree using the method in Chapter 10.
a. Consider stock price averages computed by averaging the 6-month and 1-year prices. What are the possible arithmetic and geometric averages after 1 year?
b. Construct a binomial tree for the average. How many nodes does it have after 1 year?
c. What is the price of an Asian arithmetic average price call?
d. What is the price of an Asian geometric average price call?