(a) Suppose that a share of Shell costs $21 now and that the continuously compounded risk-free rate is 1%. Compute the value of a put option to sell Shell for $22 half a year from now, under the assumption that in half a year, the share costs either $20 or $23. (This is the same situation as in the lecture, but with a put option instead of a call option.)
(b) Generalize the computation above: Suppose that a share costs S0 now and the continuously compounded risk-free rate is r. Assume that at time t (measured in years),the share costs either Sut or Sdt. Write a spreadsheet which computes the value of a put option with strike price K expiring at t. You may assume that K is between Sdt and Sut .
Hand in a print-out of the spreadsheet with the values as above (S0 = 21, r = 0:01, t = 1/2 , Sut = 23 and Sdt = 20), a print-out of the spreadsheet displaying the formulas, and an explanation of the formulas that appear in the spreadsheet.