=+The current price of a certain stock is S0 = $15. A European call maturing in one month (i.e. T = 1/12) has strike price K = $18. An investor believes that with probability of 1/2 the stock price will be either

$24 or $12. The riskless borrowing rate is zero, i.e. r = 0. By solving the equations 12 = 15(1 +

a) and 24 = 15(1 + b), we find a = –0.2 and b = 0.6 in the equation (Ia). These data satisfy2 the conditions (Ib) and (Ic).