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).

a) What are the call option values (Cu & Cd) across the two states?

b) What is the delta (i.e., hedge ratio) for the call?

c) What is the probability (Pru) that the underlying stock price will experience the u state?

d) Value the call using the risk-free approach.

e) Value the call using the risk-neutral approach.

f) 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?

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

h) What is the delta (i.e., hedge ratio) for the put?

i) What is the probability (Pru) that the underlying stock price will experience the u state? (Same as above)

j) Value the put using the risk-free approach.

k) Value the put using the risk neutral approach.