Consider a two period binomial model with - The underlying stock has an initial price of 40 - Each period is of length 6 months - u = 1.5. d = 0.6 The continuously compounding risk-free rate is 6%. a) Sketch the two period binomial tree and compute p*. b) Consider an American version of the one-year straddle with strike price K = 35. If this option is exercised at time t, then the payoff is IS(t) - 35l and the contract ends. This option can be exercised at any time. Compute the value of this straddle at each node in the binomial tree. Compute the premium of this option to the nearest .xx c) In this question, we compare the straddle with calls and puts. As we saw during our class, the European straddle can be thought of as a purchased call along with a purchased put. The American call with strike price K=35 can be shown to have price 12.32 and the American put with strike price K=35 can be shown to have price 5.57. Answer both parts below with complete sentences. You should not calculate anything. You should be clear and concise. i) To purchase both the American call and the American put costs 12.32+5.57=17.89 which is different than the premium for the American straddle from part (b). Explain why you should expect that the straddle and the combined (call+put) have different prices. li) Give a scenario where it is more beneficial to have the American call and American put than it is to have the American straddle.