Question

The short riskless interest rate is 25% per period. The two-period corn futures price is $150...

The short riskless interest rate is 25% per period. The two-period corn futures price is $150 today and will go up or down by $50 each period, with risk neutral probabilities 1/2 and 1/2. Consider a European futures call option with an exercise price of $125 maturing two periods from now.

a. What are futures prices in the tree?

b. What are the call payoffs at maturity?

c. What is the price of the futures call option at each node in the tree?

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