Question: Problem 2 : Binomial Options Pricing ( 4 points ) Imagine a case where there were only two possible stock prices in one month :

Problem 2 : Binomial Options Pricing ( 4 points ) Imagine a case where there were only two possible stock prices in one month : 8100 and 880 occurring with probabilities 60% and 40% respectively , and the current stock price was $91 60% $100 891 10% $80 We will build up to finding the no-arbitrage price of a call option with strike K - 95 that expires exactly one month from now ( a ) What will the call payoff be in case that ST - 8100 ? What about S = $80 ? We'll call the first number Of and the second Of ON ( b ) What portfolio of risk - free bonds with face value B and A shares of the underlying stock will replicate the call option

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