Consider a non-dividend paying stock with S0 = 49, sigma= 0:20 per annum. The continuously compounded risk-free interest is r = 5% per annum. Consider a European call option with strike price K = 50, and maturity of 20 weeks (so that T = 0.3846 = 20/52 ).

Compute the price of the call option by setting up a two period binomial model.

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Solution To compute the price of the call option using a twoperiod binomial model we need to first calculate the parameters of the model the up factor ... View the full answer