Question: Suppose that stock price will increase 10% and decrease 10% every year. The stock does not pay dividend and curretly is tradding at S =

Suppose that stock price will increase 10% and decrease 10% every year. The stock does not pay dividend and curretly is tradding at S = $50. Annual risk-free rate is rf = 2%.

a. [3pts] Construct a two-year binomial tree for the value of the stock.

b. [3pts] Calculate the value of a European call option on the stock with an exercise price of $52.

c. [3pts] Calculate the value of a European put option on the stock with an exercise price of $52.

d. [1pt] Confirm that your solutions for the values of the call and the put satisfy put-call parity.

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