Company Monash's share price is currently traded at $100. Over each of the next two 6-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 10% per annum with continuous compounding. (Required: Show your work step by step)

(a)            Consider a 12-month European put option with a strike price of $102, calculate the option values at nodes A to F in the following binomial tree. Use the risk-neutral valuation approach of the binomial tree model. Show your calculation and explain.

		Node D
		Suu = 121
		fuu =
	Node B
	Su = 110
	fu =
Node A		Node E
S= 100		Sud = 99
f =		fud =
	Node C
	Sd = 90
	fd =
		Node F
		Sdd = 81
		fdd =

 

(b)            If the value of a 12-month European call option with a strike price of $102 is $6.2, check whether the put-call parity hold.

(c)            If the put option is American, would it be optimal to exercise it early at nodes A, B, and C? Show your calculation and explain.