Question: 1. Consider a three-period binomial model in Figure 1 with S0=4,u=2, and d=1/2. Suppose that the real-world probability for the stock to go up at

1. Consider a three-period binomial model in Figure 1 with S0=4,u=2,

1. Consider a three-period binomial model in Figure 1 with S0=4,u=2, and d=1/2. Suppose that the real-world probability for the stock to go up at each period is p=1/3. For simplicity, we assume the risk-free rate to be zero. (a) A focus asset is a call option expiring at the end of the final stage with strike 5 . Use the martingale approach to compute the no-arbitrage price of this call option at time 0 . (b) A focus asset is a put option expiring at the end of the final stage with strike 5 . Use the martingale approach to compute the no-arbitrage price of this put option at time 1 . Is the price random or nonrandom at time 0 ? Is the price random or nonrandom at time 1 ? (c) A focus asset is an Asian call option expiring at the end of the final stage with strike 5, i.e., the payoff V3 is max((S1+S2+S3)/35,0). What is the fair price of this Asian call option at time 0

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