Task 2 [10 marks]

In this task consider a put option with: S0 = 100 E = 100 Rf = 4% Sigma = 15% T = 5 m = 200

Use the binomial option pricing model to check the sensitivity of the option price to changes (each change separately from the other changes) in the parameters.

What if:

1. Rf ranges from 0.01 to 0.10 in steps of 0.001

2. Sigma ranges from 0.01 to 0.5 in steps of 0.1 3. m ranges from 5 to 1000 in steps of 10

4. S0 ranges from 50 to 150 in steps of 1

For each change, graph the option price (y-axis) against the parameter you are changing (x-axis). What do we learn about option prices from this analysis? Explain in detail with the underlying economic intuition for these effects! (Max 300 words)