Question: Question one Consider a two-period binomial model in which a stock currently trades at a price of K65. The stock price can go up 20

Question one

Consider a two-period binomial model in which a stock currently trades at a price of K65. The stock price can go up 20 percent or down 17 percent each period. The risk-free rate is 5 percent. (i) Calculate the price of a put option expiring in two periods with exercise price of K60. (ii) Calculate the price of a call option expiring in two periods with an exercise price of K70. (20 Marks)

(iii)Risk management is not about elimination of risk, Discuss.

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