Using simple binomial trees, calculate the value of a call option with the following characteristics:
Underlying asset current value = 100.
Option exercise price in period 1 = 110.
Option exercise price in period 2 = 150.
Up movement in period 1 = 1.2, d = l/u.
Up movement in period 2 = 1.4, d = l/u.
Risk-free rate in period 1 = 10%.
Risk-free rate in period 2 = 8%.
Time to expiration = 2 years.
Number of time periods per year = 1.
The steps you will need to follow include
Create the event tree for the underlying risky asset.
Calculate whether to exercise the option on the end nodes of the option valuation tree.
Use replicating portfolio technique to value the option.