Consider a model with only one time period. Assume that there exist a stock and a cash bond in the model. The initial price of the stock is $50. The investor believes that with probability 1/3 the stock price will drop to $30 and with probability 2/3 the stock price will rise to $90 at the end of the time period. The cash bond has an initial price of $100 and it will with certainty deliver $110 at the end of the period. Use the replication principle and nd a price of a European call with a maturity at the end of the time period and a strike price of $60. Is this price fair? Explain your answer. Find the price using risk neutral probabilities. Comment on the equivalence of the two approaches.