Question: Question 2 a. Total 50 Marks Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a two-step binomial tree. Use the

Question 2 a. Total 50 Marks Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a two-step binomial tree. Use the following information to verify that the two approaches lead to the same answer: Current stock price Price change every three months 40 increase or decrease by 10% 5% per annum. Risk-free interest rate Calculate the value of a 6-month call option on this stock with an exercise price of 38. (25 marks)

Total 50 Marks Question 2 a. Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a two-step binomial tree, Use the following information to verify that the two approaches lead to the same answer: Current stock price Price change every three months Risk-free interest rate 640 increase or decrease by 10% 5% per annum. Calculate the value of a 6-month call option on this stock with an exercise price of 38. (25 marks)

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