Question: Let S = $100, K = $95, = 30%, r = 8% (continuously compounded), T = 1, and = 0. Let u = 1.3, d

Let S = $100, K = $95,

= 30%, r = 8% (continuously compounded), T = 1, and

= 0. Let u = 1.3, d = 0.8, and n = 2.

(Note that

n indicates the number of periods as in

McDonalds notation).

a. Construct the binomial tree for a call option. At each node provide the premium, ,

and

B

.

b. Construct the binomial tree for a European put option. At each node provide the

premium, (no of shares), and B (amount)

.

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