Assume that the current price of a stock is $80 and that 1 year from now the stock will be worth either $90 or $75. The exercise price of a call option for this stock is $74. Assuming a riskless interest rate of 6% per year (and discrete compounding), what is the call option price?

a) Work the problem using a binomial lattice.

b) Work the problem using replicating portfolio theory.

c) Work the problem using Black-Scholes, assume that with an incremental time step of dt = 1 year.

Hint: The solutions to parts a) and b) should be exactly the same. The Black-Scholes solution will be a bit larger.

u_