A stock price is described in this binomial tree.
T = 0 |
T = 1 |
T = 2 |
$135 |
||
$118 |
||
$107 |
||
$100 |
||
$101 |
||
$87 |
||
$79 |
a. The sukuk risk-free rate is 7.8 percent. Compute the martingale probabilities and today’s state prices of Arrow-Debreu securities for each of the four states in year two.
b. A call option with a strike at $97 and maturing at end-year 2 is written. Compute the payoffs of the call. Compute the price of the call.
c. A put option with a strike of $102 and maturing at end-year 2 is written. Compute the payoffs of the put. Compute the price of the put.