Question: 2. Consider the following equity security, safe asset, and put option as shown in the binomial diagrams below. Your problem is to find the arbitrage

2. Consider the following equity security, safe asset, and put option

2. Consider the following equity security, safe asset, and put option as shown in the binomial diagrams below. Your problem is to find the arbitrage free price of the put option, po. 55 4 52,50 5 : 50 B : Bo a 45 d 52150 Po Po U= Dol d = -0. 1 (K= 50) d 5 r = 0. 05 K= 50 Find a portfolio of the equity (or, stock) and the bond which replicates the put option's payoffs. Use the Law of One Price to compute po- k= strike price I: put option ( European Put - exercise at t= 1 only ). options - Right but NOT an OBLIGATION

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