Question: a. Compute the up and down factors for the stock price movements and the dollar return (1 + R) for each period.
b. Use these up and down factors to create a 4-period tree for the stock price movements.
- Options mature after T = 2 years and have a strike price K = $75.
- The price of the underlying stock price is $50. The stock price evolves according to the Jarrow-Rudd specification in this 4-period model with volatility S = 0.3.
- The continuously compounded risk-free interest rate r is 5 percent per year.