11. Consider the binomial tree of Figure 1. Suppose that the per-period interest rate is R...

11. Consider the binomial tree of Figure 1. Suppose that the per-period interest rate is R = 1.02.

(a) Show that the price of a call on a put in this model with a strike of k = 4 and a maturity of one period is 1.58, where the underlying put has a strike of 100 and a maturity of 2 periods.

(b) Show that the delta of the call on the put in the binomial example is -0.202. (Use the usual formula for a binomial delta.)

Figure 1: Stock Price Tree for Binomial Illustrations

(c) Verify that a position consisting of a short position in the option and a short position in 0.202 units of the stock is perfectly risk-less over the compound option's one-period life.