Question: Consider a two period Binomial Model. If the current stock price of $50 and the risk free rate is 4%. For each period the stock

Consider a two period Binomial Model. If the current stock price of $50 and the risk free rate is 4%. For each period the stock can go up to 15% and down by 5%. The exercise price of this call option is $45.

A) Find the Value of Call at time-period 0 or today using two period binomial model?

B) Please show that the Dynasty hedge works. Use the value of the portfolio for the two periods to illustrate the concept of risk-neutral pricing? What does investor earn? Use suitable examples.

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