Question: In a single period binomial model, the current underlying stock price is $10, in each period the stock can either go up by 15% or

In a single period binomial model, the current underlying stock price is $10,

in each period the stock can either go up by 15% or down by 10%. The time

0 price B0 of the ZCB (zero coupon bond) maturing at time 1 is B0 = 0.9525.

(a) Use stock price as the numeraire, determine the equivalent martingale

measure, i.e., the share measure, q for the up state.

(b) Use martingale pricing to determine the price of a straddle struck at

K = $10.

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