Question: Use the two-state binomial option-pricing model with continuous compounding for the following questions: S 0 = $100; X = $120; r f = 5.5% The

Use the two-state binomial option-pricing model with continuous compounding for the following questions:

  • S0 = $100; X = $120; rf = 5.5%
  • The stock price will either increase to $150 (u=1.5) or decrease to $80 (d=0.8).

1. Value the call using the risk-free approach.

2. Value the call using the risk-neutral approach.

3. Given the value of the call calculated above, what is the value of a put option, according to Put-Call Parity, with the same strike price and maturity date?

4. What are the put option values (Pu & Pd) across the two states?

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