a. Binomial pricing algorithm In a spreadsheet, build a 12-step binomial tree to calculate the value of a European call with a strike price of 100 and a maturity of one year. Assume that the 1-month interest rate is constant at 10% p.a., that the underlying stock pays no dividend and has a spot price of 100 which may go up or down by 2% every month.
b: Barrier option.
With a 3-step binomial tree calculate the value of a knock-out call with barrier H = 80. Assume that the price of the underlying may increase or decrease by 15 at each step, that there are no dividends, and that the interest rate is zero.
