Question one
Consider a two-period binomial model in which a stockcurrently trades at a price of K65. The stock price can go up 20percent or down 17 percent each period. The risk-free rate is 5percent.
(i) Calculate the price of a put option expiring in two periodswith exercise price of K60.
(ii) Calculate the price of a call option expiring in two periodswith an exercise price of K70.
(iii)‘Risk management is not about elimination ofrisk’, Discuss.
