This question asks you to apply your knowledge on option securities. Suppose the

Question

This question asks you to apply your knowledge on option securities. Suppose the price of a stock is $50 today and it evolves according to u = 1.2 and d = 0.9 in 6-month periods.

A. Draw and label a tree that shows the price of the stock today, after 6-months and after 1 year

B. Draw and label a tree that shows the price of a call option on the stock with exercise price $60 as Pcall and then the payoffs Cu, Cd, Cuu, Cud, Cdd. Calculate Cuu, Cud, Cdd.

C. Solve for the price of the call option today

Explanation / Answer

a

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