An economist writes a 1-period expectation model for valuing options. The model assumes that the stock starts at S and moves to 2S or 0.5S

in 1 years time with equal probability. Assume rates are zero.

(a) Using this expectation model what is the value of a call option struck at K?

(b) Now use the 1-period binomial model to calculate the risk-neutral probabilities and thus calculate the risk-neutral value of this call op- tion?

(c) Is there an arbitrage between these models? How could you capture it?