Suppose there are two trading dates, t = 0 and t = T. The date 0 price of a stock is S0. Between dates 0 and T, the stock price can go up by 10%, down by 10%, or stay the same, with equal probability. There is also an asset-or-nothing call option on the stock expiring at T, with strike price 0.95S0. The date 0 price of this option is V0. The riskfree interest rate is zero.

Suppose there are two trading dates, t = 0 and t = T. The date 0 price of a stock is So. Between dates 0 and T, the stock price can go up by 10%, down by 10%, or stay the same, with equal probability. There is also an asset-or-nothing call option on the stock expiring at T, with strike price 0.95S.. The date 0 price of this option is V. The riskfree interest rate is zero. i. Calculate V, as a function of So. If you cannot price the option exactly (as a function of So), explain why, and calculate the range of prices that are consistent with no arbitrage. ii. Now suppose you know that V = 0.6S. Consider an at-the-money European call option on the stock expiring at date T. Let Co be the date 0 price of this option. Calculate Co as a function of So. If you cannot price the option exactly (as a function of So), explain why, and calculate the range of prices that are consistent with no arbitrage. Suppose there are two trading dates, t = 0 and t = T. The date 0 price of a stock is So. Between dates 0 and T, the stock price can go up by 10%, down by 10%, or stay the same, with equal probability. There is also an asset-or-nothing call option on the stock expiring at T, with strike price 0.95S.. The date 0 price of this option is V. The riskfree interest rate is zero. i. Calculate V, as a function of So. If you cannot price the option exactly (as a function of So), explain why, and calculate the range of prices that are consistent with no arbitrage. ii. Now suppose you know that V = 0.6S. Consider an at-the-money European call option on the stock expiring at date T. Let Co be the date 0 price of this option. Calculate Co as a function of So. If you cannot price the option exactly (as a function of So), explain why, and calculate the range of prices that are consistent with no arbitrage