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

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

A. Draw the binomial tree for the stock. What are u and d?

B. Show that the call price is $4.110

C. Compute the price of American and European puts.

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