1. Using the simple one-period binomial approach, determine the value of a call option which has an exercise price of $30, given that the stock price is $28, that u = 1.4, that d = 0.8, and that rf= 10%. What is the portfolio of stocks and (riskless zero-coupon) bonds that replicates this call option?

b) Suppose that the one-year risk-free rate is 10%. The following is the binomial path for an underlying asset whose current price is $100.

1. Estimate the current value of a 2-period call (on this stock) with a stick price of $90 by working backwards along the above tree.
2. Estimate the current value of a 2-period put (on this stock) with a stick price of $90 by working backwards along the above tree.
3. Show that the put-call parity holds for the option value you computed.

uuSo = 144 uSo = 120 So = $100 udSo (duSo) = 96 dS0 = 80 ddS0 = 64 uuSo = 144 uSo = 120 So = $100 udSo (duSo) = 96 dS0 = 80 ddS0 = 64