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(10 points) Suppose that the risk free return is 5%, the stock price S(i), i = 0,1, follows the one-step binomial tree model. S(0) =

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(10 points) Suppose that the risk free return is 5%, the stock price S(i), i = 0,1, follows the one-step binomial tree model. S(0) = X = 100, the return K(1) is: 10% with prob p = j, K(1) = d= -15% with prob 1 p = U = Find all possible values for S(1). Find the risk-neutral probability P*. Use the risk-neutral probability to price the European call option with strike price X and exercise date T = 1. (Be careful: No points if other method, e.g. replication method, is used.) (Round your answer to the nearest cents.)

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