Question: Problem 4 Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is

Problem 4 Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. Use 2-, 3-, 4- and 5-step binomial option pricing models (BOPM).

a) What is the price of the option if it is a European call?

b) Can you find a pattern of the European call prices? Provide a graph to depict the relationship between the number of steps (x-axis) and the European call price (y-axis).

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