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A stock is currently at $30. Over each of the next twothree-months periods, the stock may move up to a factor 1.20 ordown by a factor of 0.80 each period. A call option with strikeprice of $32 and maturity of six months is available. The currentrisk-free rate is 4% per year. Is the call option in the money, atmoney, or out of money. Explain. Find the value of this call optionusing the binomial tree approach. Find the value of a put optionwith same strike price and maturity (using either the binomial treeapproach or put-call parity to find the put value). Is the putoption in the money? Explain. Find the time value of this putoption.
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