Question: Information from exercise 2 about the stock that you need: Consider an at-the-money European put option with one year left to maturity written on a

Information from exercise 2 about the stock that you need: Consider

Information from exercise 2 about the stock that you need: Consider an at-the-money European put option with one year left to maturity written on

a non-dividend paying stock. Let today's stock price be 50 kr and the stock volatility be 30%. Furthermore let the risk free interest rate be 10%.

3. Consider again the non-dividend paying stock in exercise 2 with price today at 50 kr and stock volatility of 30%. Assume the risk free rate is 10% as before. (a) Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate today's price of an at-ther European put that matures in one year with a strike price of 60 kr. (b) Explain how an at-the-money European put and the European put with a strike price of #kr can be combined to create a Bull spread. Calculate the price of the Bull spread, and draw both the payoff diagram and the profit diagram. (c) Consider yet another European derivative written on this non-dividend paying stock. This derivative will pay out 100 kr if the stock price in one years time is below 40 and zero otherwise. Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate today's price of the derivative. 3. Consider again the non-dividend paying stock in exercise 2 with price today at 50 kr and stock volatility of 30%. Assume the risk free rate is 10% as before. (a) Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate today's price of an at-ther European put that matures in one year with a strike price of 60 kr. (b) Explain how an at-the-money European put and the European put with a strike price of #kr can be combined to create a Bull spread. Calculate the price of the Bull spread, and draw both the payoff diagram and the profit diagram. (c) Consider yet another European derivative written on this non-dividend paying stock. This derivative will pay out 100 kr if the stock price in one years time is below 40 and zero otherwise. Use the one-year, two-step Binomial stock tree that you constructed in exercise 2 and calculate today's price of the derivative

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