Suppose the stock price of Tesco (TSCO.L) changes only once a month: either it goes up by 22% or it falls by 20%. Its pr

[answerhappygod]

Suppose the stock price of Tesco (TSCO.L) changes only once a
month: either it goes up by 22% or it falls by 20%. Its price now
is £40. The interest rate is 12.7% per year, or about 1% per
month.
Required:
a) Suppose a
one-month call option on this stock has an exercise price of £40,
what is the option delta?
(6 marks)
b) Show how the
payoffs of this call option can be replicated by buying Tesco’s
stock and borrowing.
(6 marks)
c) Use the
risk-neutral method to calculate the value of a one-month call
option with an exercise price of £40.
(6 marks)
d) Construct a
two-month binomial tree. What is the value of a two-month call
option with an exercise price of £40?
(6 marks)
e) Discuss why a
one-month put with the same exercise price can be calculated by
using put-call parity.
(6 marks)