Question: Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The

Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The risk free rate over the period is 10% given annual compounding. [Letrdenote the continuously compounded rate per year. Thuser1= 1.1.] AAmericancall option on the stock with an exercise price of $75 matures in one period (1 year). If you want to price the option with aone-stepbinomial tree. Please show work

Question 1

What areuandd?

Question 2

What are the payoffs from the call in each state of the world?

Question 3

What is the European call price at time 0?

Question 4

What are the pseudoprobabilities of the up and down movements in the stock price?

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