This is Question 2 a. Please show your work, do not just write down the answer. You do not have to derive formulas that are already available. b. In your final answer, precision of 2 digits after the decimal point is sufficient. c. You may only use a nonprogrammable calculator to do your calculations. d. The total duration to submit your answer to this question is 60 minutes. 2) (45 points) Consider a monthly binomial price process with u=1.10 and d=0.90 for some stock where the monthly interest rate is 5% and the initial stock price is $1000. The price of the share of stock goes up in each period with probability 60% and down with probability 40%. In all of the questions below, the time to expiration of any option is T=3 months and the strike price is K=$1000. Give your answers by contructing a binomial lattice or tree whenever necessary. a) (5 points) Determine the binomial stock process. b) (10 points) What is the price of a European call option? c) (10 points) How would you trade (what is the replicating portfolio) if the price goes up to 1,100 after 1 month? d) (10 points) What is the price of an American put option? e) ( 10 points) What is the price of a derivative security that pays the holder the absolute value of the difference between the stock price and the strike price; i.e., Payoff =S(3) 1000