Question: Binomial Tree Pricing A stock price is currently $25. It is known that at the end of two months it will be either $27 or

Binomial Tree Pricing

A stock price is currently $25. It is known that at the end of two months it will be either $27 or $23. The risk-free interest rate is 10% per annum with continuous compounding.SupposeSTrepresents the stock price at the end of two months.

(a) The payoff of a new type of derivative is ST2(i.e., stock price at time T squared) at the end of two months.What are thetwopossible payoffs?

(b) What is the price of the derivative in (a). Solve byforming a risk-less portfolio.Round toonedecimal place.

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