a) The current price of Excel Network Systems stock is £60 per share. In each of the next two years the stock price will either increase by 20% or decrease by 10%. The 3% one year risk free rate of interest will remain constant. Calculate the price of a two year European put option on Excel Network Systems stock with a strike price of £60. Use binomial pricing
b) Suppose you want to buy a call option under the following circumstances: d1=ln[S/PV(X)]/(sigmaT1/2)+(sigmaT1/2/2) and d2= d1- sigmaT1/2.
Stock price S = £100 Exercise/strike price X = £95 Interest rate r = 10% per year Time to maturity T = 3 months or 0.25 Standard deviation ? = 50% Value this option using the Black-Scholes valuation method.