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1. Consider a put option on a stock index with a strike price of 2,500;...

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1. Consider a put option on a stock index with a strike price of 2,500; it expires in 1 year. The index is currently valued at 2,658. By next year, the index could increase by 10%. The risk-free rate is 2.8%. Answer the following questions based on the one-period binomial model. a. What are the U and the D? (6 points) b. What will be the option payoffs if(i) the index value increases and (ii) the index value decreases? (6 points) C. What is the probability that the stock index will (i) increase and (ii) decrease? (6 points) d. What should the premium for the option be? (4 points) e. The option is currently selling for $25.67. What does your result from d. suggest about the market price? Why? (3 points)

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