1.Binomial Tree

Sam Jones is an analyst at a VC firm and needs to determine the value of an option to buy one share imbedded in one of the proposed securities for a deal for SkunkWorks, Inc. Sam believes that SkunkWorks will either succeed massively or fail miserably in a year. You can assume this is a "European" style option (with a fixed expiration date in one year), interest rates are zero, and there are no transactions costs. (30 pts)

What should he pay for a call option based on a replication ratio of SkunkWorks stock and SkunkWorks bonds (binomial tree)?

SkunkWorks Inc., today

Price per share: $100

bond price: $100

SkunkWorks Inc., in one year:

Succeed massively: price per share: $150

Fail miserably: price per share: $50