Question: Let S = $40, K = $40, r = 8% (continuously compounded), u = 30%, 8 = 0, T = 0.5 year, and n =

  1. Let S = $40, K = $40, r = 8% (continuously compounded), u = 30%, 8 = 0, T = 0.5 year, and n = 2.

a. Construct the binomial tree for the stock. What are u and d?

b. Compute the prices of European Call.

c. Compute the prices of European Put.

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