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  3. 6 a stock currently costs 4 per share in each...

Question: 6 a stock currently costs 4 per share in each...

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6. A stock currently costs $4 per share. In each time period, the value of th<e stock will either increase or decrease by 50%, and the risk-free interest rate is r 1/10. Let So, Si, and S2 be the prices of the stock at times 0, 1, and 2, and suppose we are selling a European-style call option expiring at time 2, with a strike price of vS1S2. That is, the value of the option at time 2 is (S2-VS152)+. (This can be compared with the Asian option described in Exercise 1.8 in the text; the differences are that here the strike price is also a random variable, and the average is geometric rather than arithmetic.) Finod the risk-neutral price of this option at time 0 by completing the following tree.X1(H) = So Xo SI(T) Vi(T) = Ду(T) = Xi (T)

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