1. Consider a 2-period binomial model of pricing European call option. Let the initial stock price be S₀ = 10 per share, u = 2 be up factor, d = 0.5 be down factor, r = 0.25 be rate of interest per time period, K = 14 be strike price.

(a) Find the initial price of the European call option.

(b) Find the portfolio process.

(c) Use the put-call parity to determine the initial price of the European put option.