Question: 2. Consider a stock whose current price is $100, and volatility is 20% p.a. The stock is expected to pay a dividend of $2 in

2. Consider a stock whose current price is $100, and volatility is 20% p.a. The stock is expected to pay a dividend of $2 in one months time. The risk-free rate is 5% p.a. continuously compounding.

(a) Using a two-period binomial tree, what is the value of a 2-month American call whose exercise price is $101?

(b) Using a two-period binomial tree, what is the value of a 2-month American put whose exercise price is $101?

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