Question: Suppose that stock price will increase 5% and decrease 5% every year. The stock does not pay dividend and curretly is tradding atS= $100. Annual

Suppose that stock price will increase 5% and decrease 5% every year. The stock does not pay dividend and curretly is tradding atS= $100. Annual risk-free rate isrf=3%.

  1. [3pts] Construct a two-year binomial tree for the value of the stock.
  2. [3pts] Calculate the value of a European call option on the stock with an exercise price of $101.
  3. [3pts] Calculate the value of a European put option on the stock with an exercise price of $101.
  4. [1pt] Confirm that your solutions for the values of the call and the put satisfy put-call parity.
  5. [5pts] [Extra credit and not required] Calculate the value of an American put option on the stock with an exercise price of $101.

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