Answer:
Explanation:
Solution:
Parameters are u = 0.1, d = −0.1, 1 + r = e
0.5×0.08. So the risk-neutral probability is
p
∗ = 0.7. After evaluation of the options at the terminal nodes we use the risk-neutral
valuation to get (i)
πC(0) = e
−2(0.5×0.08) £
0.7
2 × 21 + 2 × 0.7(1 − 0.7) × 0 + (1 − 0.7)2 × 0
¤
= 9.61
and (ii)
πP (0) = e
−2(0.5×0.08) £
0.7
2 × 0 + 2 × 0.7(1 − 0.7) × 1 + (1 − 0.7)2 × 19¤
= 1.92
(iii) For put-call parity one has to verify S − πC + πP = Ke−r
, here :
100 − 9.61 + 1.92 = 100e
−0.08
.
