Question: Use a 3 step binomial tree to value a call option.Draw the tree.The option expires in 6 months.The interest rate is 5% annually continuouslycompounded.The spot

Use a 3 step binomial tree to value a call option.Draw the tree.The option expires in 6 months.The interest rate is 5% annually continuouslycompounded.The spot price is at 100. U= 1.2 and D = 0.8.The strike price of this optionis 95. Show all of your calculations.[15 marks]Question 14What are contango and backwardation in futures markets? What might cause theseconditions to exist? Are there any explanations for why markets may trade in contango orbackwardation?

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