Question: Binomial trees: Spot price = $16, Strike price = $18, Risk free rate = 6% per annum with continuous compounding Additionally, assume that over each

Binomial trees:

Spot price = $16, Strike price = $18, Risk free rate = 6% per annum with continuous compounding

Additionally, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%.

  1. Use a two-step binomial tree to calculate the value of an eight-month American put and call option. [1 mark]
  2. Calculate the deltas of the European put and the European call at the different nodes of the binomial three. [1 mark]

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