Question: Problem 1. Consider a stock in a binary one-period model with value 100 USD at time t = 0. We assume that the value increases

Problem 1. Consider a stock in a binary one-period model with value 100 USD at time t = 0. We assume that the value increases by 35 percent in the up-state and decreases with 10 percent in the down-state. The risk free interest rate r = 5 percent.

(i) Calculate the risk neutral probability distribution at maturity.
(ii) Calculate the arbitrage free price p of a European put option written on this stock with strike price K = 145 USD.

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