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Problem 2: A stock currently sells for $50. In six months it will either rise...

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Finance

Problem 2:

A stock currently sells for $50. In six months it will either rise to $60 or decline to $45. The continuous compounding risk-free interest rate is 5% per year.

  1. Using the binomial approach, find the value of a European call option with an exercise price of $50.
  2. Using the binomial approach, find the value of a European put option with an exercise price of $50.
  3. Verify the put-call parity using the results of Questions 1 and 2.

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