Using a one period binomial model

Given

S0 = $20

K = $21

Su = $22

Sd = $18

r = 12%

T = 3 months

And e^-rT

1. Draw a time line, solve for u and d, and draw the corresponding stock price tree.

2. Using the present value of the expected cash flows find the current value of the call option that expires in 3 months.

3. Using the present value of the expected cash flows find the current value of the put option that expires in 3 months.

4. Solve for delta, .

Where = [_{u u} + _{d d}] e^-rT

= (_{u d} )/(_o( ))

_u = (^r*t )/( )

_d = (1 _u )

Using a two period binomial model

Given the information from above and the following:

t = .125 And

e^(-rt)

1. Draw a time line and draw the corresponding stock price tree.

2. Using the present value of the expected cash flows find the current value of the call option that expires in 3 months.

3. Using the present value of the expected cash flows find the current value of the put option that expires in 3 months.

Where

= [_{u u} + _{d d}] ^()

= (_{u d} )/(₀( ) )

_u = (^() )/()

_d = (1 _u)