BINOMIAL MODEL: (not out of book) Let's assume the current price of gold is S(0) = $60/gram. Next Monday (time t=1) the Freeport McMoran company will release the results on the new gold-based catalyst for sunlight-based hydrolysis. Industry analysts expect the price either to rise to $72 if the experiments are promising, or to sink to $50 if they aren't. But no one knows what the situation actually is! Let the probability that S(I) = 72 be p and that S(1)=50 be (1-p). (4) For what value of p is the expectation of S(1) equal to S(O) = 60? Suppose you are an options dealer interested in knowing the price of a call with exercise price X=65. What is the payoff if S(1)=50? If S(1)=72 ? (5) Use the foregoing, probabilities and payoffs to calculate the expectation of the payoff. This is the Binomial Black Scholes price of the option