Question

# Suppose that there are three periods: 0,1 and 2. We consider stocks A,B, and C. None of the three stocks pay any

dividend. In period 0, the price of stock A is (S_a_0) − 99.5, the price of stock B is (S_b_0) − 94, and the price of stock C is S_c_0 = 106.5. The one-period risk-free rate in period 0 is denoted by r_0. The period 1, there are three states: "up","med", and "down". State "up" occurs with probability 0.4; State "med" occurs with probability 0.3; State "down" occurs with probability 0.3. The price of the three stocks in period 1 is given by the following state table:

The one-period risk-free rate in period 1 r_1 is 5%. Let C(110) be the price of a European call option on stock A that expires in period 2 with the strike price 110. Let P(110) be the price of European put option on stock A that expires in period 2 with the strike price 110.

(a) What is r_0

(b) Calculate C(110) - P(110)

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