b) Consider a call option with a strike price of $65 whose current price is $60. Suppose there are two-time steps of one year, and in each time step the stock price moves up by a proportional amount of 20%. Also suppose that the risk-free rate is 6%. Calculate the value of a two-step call option. (14 marks) Hint: - Calculate d using d=1/4 Calculate the value of the probability of the up-move as: Plu) = (1+rf-d)/(u-d) Calculate the value of the probability of the down move as P(d) = 1-P(u) c) You are given the following information with respect to binomial option pricing model: The exercise price of the option is $50 The current asset price is $60 The size of the up move is 25% The risk-free rate is 6.5% It is a two-stage option pricing model. Calculate the price of the option given the information above (14 marks) Hint: - Calculate d using d=1/u Calculate the value of the probability of the up-move as: P(u) = (1+rf-d)/(u-d) Calculate the value of the probability of the down move as P(d) = 1-P(u)