2. A four-step binomial tree for the price of a stock St is to be calculated using the up and down ticks as u=1.25 and d=1/u as the two states of the world at each node. These up and down movements apply to one-year periods denoted by =1. Time is measured in years and T=3 is the expiration date for a European call option C1 written on St. The stock does not pay dividends. Risk-free interest rate is constant at 5%. - How to find the approximate (implied) annual volatility of St ? - Calculate the four-step binomial trees for St and Ct with S0=$100,K=$100. - Calculate the arbitrage-free price C0 of the call option at time t=0. Vote: You could do discrete compounding and discounting here, meaning (1+r)=1.05