Assume that the present price of a stock is $S_0=1.$ Every three months stock price

moves up by a factor $u$ or moves down by a factor $d.$ The three month interest rate is $r.$

Draw the binomial tree $[7\mathrm{.}5$ Points$]$

Derive the price of an European call option where the strike price $K$ satisfies fol$-$

lowing inequality: $[7\mathrm{.}5$ points$]$

$u^{2}d>K$