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A stock is currently priced at 40 with a continuously

A stock is currently priced at $40, with a continuously compounded rate of return of mu = 15%, and a volatility of sigma = 40%. The continuously compounded risk-free rate is 4%.

We want to value European call contract with a strike price of $45, and an expiry at T = 0.5 years. Use a 5-step binomial approximation in Excel to answer the following questions:

a. What are the terminal step values for the put values?

b. What are the values of delta T, U D_ and R?

c. Show your stock price tree.

d. What is the risk-neutral "up" probability, q?

e. What is the value of the call option?

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Financial Management: A stock is currently priced at 40 with a continuously

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