Let h = T/N be the length of one time-step in the binomial tree model. Set u = e

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Let h = T/N be the length of one time-step in the binomial tree model. Set u = exp ( square root of h) and d = exp ( - square root of h), Fix T = 1, = 0.4, S(0) = K = 100 and interest rate of r = 5percent yearly, compounded continuously. There are no dividends. Compute the price C_0 of a European Call with the above parameters using N = 4, 8,15, 30, 60,90,120 (i.e. varying the number of steps, while keeping the maturity fixed and using the particular scaling of u and d above. Note that as N grows, h shrinks.) Also compute the Black-Scholes price of this Call. Comment on the answer in relation to what you obtained in part 1. Repeat part 2 for = 0.2.0.3, 0.5. What happens to C_0 as a function of a?

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