Question: One-period binomial option pricing model: S = $100, q = 0.75 (the probability to go up), SU = $130, SD = $85, n = 1,

One-period binomial option pricing model: S = $100, q = 0.75 (the probability to go up), SU = $130, SD = $85, n = 1, X = 120, and risk-free rate = 2% per period.

(a) What is the risk-neutral probability for a call option with one period to maturity?

(b) What is the price of the call?

(d) How do you replicate the payoffs of a long call?

(e) How do you form a riskless hedge portfolio using the stock and the call?

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