Question: Consider a 6-month binomial model in which the underlying asset is trading at 30. The underlying stock can go up 20 percent or down by

Consider a 6-month binomial model in which the underlying asset is trading at £30. The underlying stock can go up 20 percent or down by 15 percent in the 6-month period. The expected required rate of returns for the underlying is valued as 15% per period. The annual risk-free rate is 5 percent and striking price is £32.

(a) Determine the price of a European put option. Explain your method and detail the procedure.

(b) Determine and explain how to obtain the price of a European put option expiring in two periods – two 6-month periods, by considering a 2-period binomial model.

(c) Continue with part (a). What would your answer change if the underlying asset pays a £5 dividend at the end of 2 periods? Explain the equations and procedure.

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