Suppose that stock prices are given by a recombinant tree. Let So = 100, u =...

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Suppose that stock prices are given by a recombinant tree. Let So = 100, u = 1.1, d = ,8t = 1, simple interest rate r = 0.01 per period (8t) and current time be 0. (a) [8 marks] What is the cost of an European option to buy the stock at price 95 at time 2. Please calculate it by backwards induction and also construct portfolios that exactly replicates the claim at each node. (b) [5 marks] What is the cost of an American Put to sell the stock at price 105 at time 3 ? At what time will it be exercised? Suppose that stock prices are given by a recombinant tree. Let So = 100, u = 1.1, d = ,8t = 1, simple interest rate r = 0.01 per period (8t) and current time be 0. (a) [8 marks] What is the cost of an European option to buy the stock at price 95 at time 2. Please calculate it by backwards induction and also construct portfolios that exactly replicates the claim at each node. (b) [5 marks] What is the cost of an American Put to sell the stock at price 105 at time 3 ? At what time will it be exercised?

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The image presents a finance problem related to options pricing using a binomial tree model I will address the two separate parts of the question a European Call Option We are given a recombinant bino... View the full answer