3.1 The Cox-Ross-Rubinstein (CRR) model is a Binomial tree in which the up and down factors are given as u = e^(σ sqrt(h)) , d = e^(−σ sqrt(h)) , where σ denotes the volatility parameter and h stands for the length of a single period in a tree. 3.1.1 What is the ratio Su/Sd? [2] 3.1.2 What is the (as simplified as possible) expression for the risk-neutral probability of the stock price going up in a single step? [2] 3.2 Find the current price of a one-year, R110-strike American put option on a non- dividend-paying stock whose current price is S(0) = 100. Assume that the continuously compounded interest rate equals r = 0.06. Use a two-period Binomial tree with u = 1.23, and d = 0.86 to calculate the price VP(0) of the put option.

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3.1 The Cox-Ross-Rubinstein (CRR) model is a Binomial tree in which the up and down
factors are given as
u = e^(σ sqrt(h))
, d = e^(−σ sqrt(h))
,
where σ denotes the volatility parameter and h stands for the length of a single period
in a tree.
3.1.1 What is the ratio Su/Sd? [2]
3.1.2 What is the (as simplified as possible) expression for the risk-neutral probability
of the stock price going up in a single step? [2]
3.2 Find the current price of a one-year, R110-strike American put option on a non-
dividend-paying stock whose current price is S(0) = 100. Assume that the continuously compounded interest rate equals r = 0.06. Use a two-period Binomial tree with
u = 1.23, and d = 0.86 to calculate the price VP(0) of the put option.

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