Question: Consider the data on European put option, as described below. stock price today: 5.03 exercise price: 5.00 Maturity: One year risk free interest rate: 0.4822%

Consider the data on European put option, as described below.

stock price today: 5.03

exercise price: 5.00

Maturity: One year

risk free interest rate: 0.4822% per annum


stock prices may either go up by 57.04% or down by 36.32% between now and the maturity.

(i) use a one-period binomial tree approach to value the put option

(ii) replicate an investment in the stock by a combination of the put option and risk-free lending.

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