A stock price is currently $38. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with quarterly compounding is 4% per annum. Calculate the value of a three-month European call option on the stock with an exercise price of $40. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers.

Please show your work on excel

A B C D E F 1 2 3 4 5 A stock price is currently $38. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with quarterly compounding is 4% per annum. Calculate the value of a three- month European call option on the stock with an exercise price of $40. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers. 6 7 8 K 9 S 10 S 11 Sd $40.00 $38.00 $45.00 $35.00 4% 3 months Option payoff 12 r 13 T 14 15 Risk-neutral valuation 16 17 T 18 u 19 d 20 21 Risk-neutral probability 22 Option price 23 24 25 No arbitrage valuation 26 27 Stock price 28 29 30 31 32 33 34 35 Option payoff 36 37 38 39 40 $38.00