Suppose the stock price of FIN524B, whose current price is S0 = $100, can only go up by u = 1.2 (to S0u) and go down by d = 1 u every 6 months. The current annualized continuously compounded interest rate is r = 5% (that is, $1 today is worth e t 12 r in t months) and the stock pays no dividends. Use a two-period Binomial tree and the risk neutral pricing methodology to compute the price of a European put option and a European call option on this stock with the same strike price K = $100 and expiring in 1 year.

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To compute the price of a European put option and a European call option using the riskneutral prici... View the full answer