Question 1

Calculate the risk neutral probability of an upward move in a binomial problem wherein the underlying asset starting at 100 may increase to 130 under favorable conditions or decrease to 70 under unfavorable conditions if the risk-free interest rate is 10%?

Question 2

If the futures or forward price for an asset can appreciate by 20% or decrease by 20% over one period, calculate the risk-neutral probabilities in both the up and down states.

Question 3

If a put option on a stock with an exercise price of $90 per share is about to expire when the underlying stock price is $96 per share, what is the entire put contract worth?

Since there are 100 shares represented by one contract, the value would be 100 x (96 - 90) = $600

### Question 4

Find the forward rate two years in the future for British pounds if the spot rate is 1.90 $ per pound and the dollar interest rate is 4% per year and the pound interest rate is 6% per year.

(7)An underlying asset has future payoffs as illustrated by this diagram.