Use the Following Data for a Two-Period Binomial Model to Answer

question 3

Multiple Choice

Use the following data for a two-period binomial model to answer the questions that follow.
- The stock's price S is $100.After three months,it either goes up and gets multiplied by the factor U =1.13847256,or it goes down and gets multiplied by the factor D = 0.88664332.
- Options mature after T = 0.5 year and have a strike price of K = $105.
- The continuously compounded risk-free interest rate r is 5 percent per year.
- Today's European call price is c and the put price is p.Call prices after one period are denoted by c_U in the up node and c_D in the down node.Call prices after two periods are denoted by c_UD in the "up,and then down node" and so on.Put prices are similarly defined.
-Call prices (in dollars) are given by:

• A) c = 8.81,c_U=17.84,c_UU = 36.11,and zero at other nodes
• B) c = 7.68,c_U =15.09,c_D = 0.47,c_UU =29.61,c_UD = 0.94,c_DD = 0
• C) c =4.78,c_U = 9.69,c_UU = 19.61,and zero at other nodes
• D) c = 6.00,c_U =12.16,c_UU =24.61,and zero at other nodes
• E) None of these answers are correct.

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Ted Kaczynski

An American domestic terrorist, also known as the Unabomber, who engaged in a nationwide bombing campaign against people involved with modern technology, motivated by his belief in the negative effects of industrial-technological society.