Question 1 Answer the following questions: a. Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a one- step binomial tree. (8 marks) b. A stock price is currently 50. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of 51? (8 marks) c. For the situation considered in Part b), what is the value of a six-month European put option with a strike price of 51? Verify that the European call and European put prices satisfy put-call parity. (12 marks) d. If the put option were American, would it ever be optimal to exercise it early at any of the nodes on the tree