1 ) In a three period (two step) binomial model with u = 1.05, d = .9, and r = .05 price a call option and a put option using replicating portfolios. Does put-call parity hold?
2) What happens to the hedge ratio as the stock price goes up? What happens as it goes down? Prove with help of hedge ratio formula
3) A stock will either go up to uS or down to dS next period. The risk-free rate is r. Use replicating portfolios to derive the premium on a futures contract with futures price F. What would the futures price need to be for this premium to equal zero?
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