Question: 3 Binomial trees I. Suppose that RedHat currently trades at $35. The interest rate is 4% (with continuous com- pounding), and RedHat shares have a

3 Binomial trees I. Suppose that RedHat currently trades at $35.

3 Binomial trees I. Suppose that RedHat currently trades at $35. The interest rate is 4% (with continuous com- pounding), and RedHat shares have a volatility of 20%. Set up a two step binomial tree for the stock, with each step representing three months (a) What is the value of a European call option with strike price $36, maturing in six months time? (b) What is the value of a European put option with strike price $36 maturing in six months time? (c) Verify that the put-call parity relationship holds

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