Question: a) Use a 3 step binomial tree to value a European put option. b) c) The option expires in 6 months. The interest rate

a) Use a 3 step binomial tree to value a European put option. b) c) The option expires in 6 months. The interest rate is 10% annually continuously compounded. The spot price is at 100. U= 1.2 and D = 0.8. The strike price of this option is 95. Show all of your calculations. [10 marks] Explain and contrast the two approaches an investment bank could take to creating a principle protected structured product, the bond plus option approach and Constant Proportion Portfolio Insurance. [10 marks] Explain why the delta hedging of a negative gamma options position loses money. [10 marks]

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