Question: A stock may either go up or down over the next 3 months. It is currently selling for $85; in 3 months time, it may

A stock may either go up or down over the next 3 months. It is currently selling for $85; in 3 months time, it may go up to $110 or down to $65. A three-month call option is currently trading on the stock with a strike price of $90. The three month interest rate is 2%.

(a) At what price should the call be trading?

(b) If, instead of $110 and $65, the stock might trade at $120 and $55 (chang-ing each outcome by $10), at what price should the call be trading?

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