answer part b only

2. Trinomial Option Pricing Model The trinomial tree option pricing method is like the binomial tree option pricing model with a difference that the price of the underlying asset may remain unchanged. Let probability of up movement = p probability of no movement = r probability of down movement = 9 where p + q + r = 1. Let f be the option price at time 0, frufa be the option prices after one time-step where the subscript u, n,d denote up, no and down movement of the underlying asset. Similarly, for two time-steps: fuu.fun faa fua, fun, fnd. (a) Derive the formula for the option price f after (i) one time-step At and (ii) two time-steps 2t. (b) By using the European call option in (1) (c) above, find the price of the option after two time-steps. Use the following: (erat/2 -0/4/2) p=P 02 2 (exat12 erat/2) q = Pa = 2 0 = eAt/2-e-a At/2 = (15 marks) 2. Trinomial Option Pricing Model The trinomial tree option pricing method is like the binomial tree option pricing model with a difference that the price of the underlying asset may remain unchanged. Let probability of up movement = p probability of no movement = r probability of down movement = 9 where p + q + r = 1. Let f be the option price at time 0, frufa be the option prices after one time-step where the subscript u, n,d denote up, no and down movement of the underlying asset. Similarly, for two time-steps: fuu.fun faa fua, fun, fnd. (a) Derive the formula for the option price f after (i) one time-step At and (ii) two time-steps 2t. (b) By using the European call option in (1) (c) above, find the price of the option after two time-steps. Use the following: (erat/2 -0/4/2) p=P 02 2 (exat12 erat/2) q = Pa = 2 0 = eAt/2-e-a At/2 = (15 marks)