Suppose a stock is currently trading at 100, and each of the next two periods will...

 

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Suppose a stock is currently trading at 100, and each of the next two periods will either go up by 35% or down by 25%. The stock pays no dividends. The simple one-period risk-free rate is 5%. (a) What is the price of a two-period ATM European call written on the stock? (b) Draw the price tree for the two-period call struck at 110. (c) What is the replicating portfolio for the call in part (b), at initiation, and at both the up- and down-nodes? (d) How would your answer to part (b) change if the option was Ameri- can? Justify! (e) Draw the price trees for the two-period European puts struck at 90 and 95. (f) Would your answer to the previous part (the OTM puts) change if the options were American? Justify! Suppose a stock is currently trading at 100, and each of the next two periods will either go up by 35% or down by 25%. The stock pays no dividends. The simple one-period risk-free rate is 5%. (a) What is the price of a two-period ATM European call written on the stock? (b) Draw the price tree for the two-period call struck at 110. (c) What is the replicating portfolio for the call in part (b), at initiation, and at both the up- and down-nodes? (d) How would your answer to part (b) change if the option was Ameri- can? Justify! (e) Draw the price trees for the two-period European puts struck at 90 and 95. (f) Would your answer to the previous part (the OTM puts) change if the options were American? Justify!