Suppose that Stock XYZ is currently trading at $30 and does not pay any dividends. Using a binomial tree with two periods, we would like to price a European put option with a strike of $25 and a maturity of three months. Assume that annual continuously compounded interest rate is 6% and the volatility of the stock is 10% per year.
a. Find the binomial tree parameters u,d,p and (1− p).
b. Draw the binomial tree for the stock price.
c. Draw the binomial tree for the put option and find the value of the put option