Question: (2) (20pts = 10+10) Consider a single period binomial model where a stock has current price $100. After one year the stock is worth $110

(2) (20pts = 10+10) Consider a single period binomial model where

(2) (20pts = 10+10) Consider a single period binomial model where a stock has current price $100. After one year the stock is worth $110 with probability 0.8, and $90 with probability 0.2. One-year annual interest rate is 5%. (a) Determine the equivalent martingale measures associated with the following numerairs: (i) the ZCB (zero coupon bond) maturing in 1 year; (ii) the stock (b) Apply the martingale pricing to price a one-year strangle struck at K1 = 95 and K, = 100 by using the stock as the numerair and its associated equivalent martingale measure. = (2) (20pts = 10+10) Consider a single period binomial model where a stock has current price $100. After one year the stock is worth $110 with probability 0.8, and $90 with probability 0.2. One-year annual interest rate is 5%. (a) Determine the equivalent martingale measures associated with the following numerairs: (i) the ZCB (zero coupon bond) maturing in 1 year; (ii) the stock (b) Apply the martingale pricing to price a one-year strangle struck at K1 = 95 and K, = 100 by using the stock as the numerair and its associated equivalent martingale measure. =

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