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Please show the steps for question C(Asian Option Price Tree) Build a two-step...

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Finance

Please show the steps for question C(Asian Option Price Tree)

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Build a two-step stock price tree with the CRR approximation using the following information: - maturity: 6 months - annual volatility of the stock: 0.25 - annual, continuously compounded risk-free rate: 0.04 - stock price today: 100 A. Calculate the stock price tree. [5 marks] B. Calculate the price of a Europan call option with strike 80 . [5 marks] C. Use the same stock price tree as in (A) to calculate the price of an Asian call option with strike 90 (maturity 6 months). Asian call option payoffs at maturity are equal to the average stock price minus the strike or zero, whichever is greater. [10 marks] Your answer: Note: I only provide the numerical answer here. In the exam you are expected to also describe how you obtained these results. A. The stock price tree is given in C B. We can use the risk-neutral pricing approach to obtain: e0.040.5[2max(128.4080,0)+2(1)max(10080,0)+(1)2max(77.8880,0)] where is the risk-neutral probability. The calculation yields 22.085 . C. The price is tree and the tree for the Asian option prices are given as follows

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