You will consider puts and calls on a share with a spot price of $150. Strike price is $148. The risk-free interest rate is 4% per annum with continuous compounding. Binomial trees: Furthermore, assume that over each of the next two three-month periods, the share price is expected to go up by 5% or down by 5%. a.

Draw a two-step binomial tree and populate the individual nodes with the share price values at each node.

b. Use the two-step binomial tree from a. to calculate the value of a six-month European call option using the no-arbitrage approach.

c. Use the two-step binomial tree from a. to calculate the value of a six-month European put option using the no-arbitrage approach.

d. Show whether the put-call-parity holds for the European call and the European put prices you just calculated in b. and c.

e. Use the two-step binomial tree from a. to calculate the value of a six-month European call option using risk-neutral valuation.

f. Use the two-step binomial tree from a. to calculate the value of a six-month European put option using risk-neutral valuation.

g. Verify whether the no-arbitrage approach and the risk-neutral valuations lead to the same results.

h. Use the two-step binomial tree from a. to calculate the value of a six-month American put option.

i. Without calculations: What is the value of a six-month American call option with a strike price of $148? Why?