There are 3 states of nature, A, B, and C and no inflation. We observe the following asset prices. The risk-free real rate is 2%. A stock with no dividend yield, its price goes up either 2% or 15% or -10%. A European call option with strike price equal to spot price is sold for 7% of spot price of stock.
1. Illustrate the payoff trees of each asset.
2. Determine the risk neutral probabilities that are consistent with these asset prices?
3. Price a European put option with strike price equals to spot price.