In this question, you need to price options with binomial trees. You will consider puts and calls on a share with the spot price of $30. The strike price is $34. Furthermore, assume that over each of the next two four-month periods, the share price is expected to go up by 11% or down by 10%. The risk-free interest rate is 6% per annum with continuous compounding.

the risk-free interest rate is 6% per annum with continuous compounding.

1. Use a two-step binomial tree to calculate the value of an eight-month European call option using the no-arbitrage approach. [3 marks]

2. Use a two-step binomial tree to calculate the value of an eight-month European put option using the no-arbitrage approach. [3 marks]

3. Show whether the put-call-parity holds for the European call and the European put prices you calculated in a. and b. [1 mark]

4. Use a two step-binomial tree to calculate the value of an eight-month European call option using risk-neutral valuation. [1 mark]

5. Use a two-step-binomial tree to calculate the value of an eight-month European put option using risk-neutral valuation. [1 mark]

6. Verify whether the no-arbitrage approach and the risk-neutral valuation led to the same results. [1 mark]

7. Use a two-step binomial tree to calculate the value of an eight-month American put option. [1mark]

8. Without calculations: What is the value of an eight-month American call option with a strike price of $34? Why? [2 marks]