Bonus Problem 1 (Optional, 25 marks) The current price of a company stock is $40...
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Bonus Problem 1 (Optional, 25 marks) The current price of a company stock is $40 and its future price in the coming year is simulated by 2- period binomial tree model with = 1.1 and = 0.9. The annual riskfree interest rate is = 5% convertible continuously. We consider a 6-month European call options which the investor has a right buy a 6-month European put options on the company stock (which expires at period 2) with strike price $42 at price $3.2. Determine the price of this European option. (Hint: Write down the terminal payoff of the call option. Recall that we need to find the terminal payoff first in order to get the current price. Find this terminal payoff using the binomial tree model.)
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