S , f (1 – p) Assume a stock price (S) is $90, and in the next three months it will either rise by 10% (u = 1.1) or fall by 10% (d = 0.9). The risk-free interest rate is 10%. A put option on this stock has a strike price of $92.
Use a one-step binomial tree (see figure above) for this question. [For all questions below, please provide answers to FOUR decimal places. Do not use ‘S’. For example, if your answer is $0.25, please enter: 0.2500 a) Calculate the probability (p) of the stock price increasing over the three month time period. OPTIONAL: In the box below, show your work for your answer to the question above (or provide the equation you used). NOTE: If your answer above is correct you will get full marks even if you don’t show your work; if it is incorrect you may get part marks for showing your work. b) Calculate the probability (1-p) of the stock price decreasing over the three month time period.
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