Put option questions 8th


Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree. Explain why it is not possible to set up a position in the 8rh and the option that remains riskless for the whole of the life of the option. The risk-free interest rate is 10% per annum with continuous compound ing. Use no-arbitrage arguments. The risk-free rate of interest with quarterly compounding is 8% per annum.

The risk-free rate is 3% (continuouslycompounded).




Put option questions 8th

Put option questions 8th