Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go

up by 15% or down by 20% each of the two binomial periods. The risk-free rate is 10%.

Determine the price of the option today. Then construct a risk-free hedge for a long stock and a

short option. At each point in the binomial tree, show the composition and value of the hedge

portfolio. For period 1 (that is h), demonstrate that the return is the same as the risk-free rate.

(Assume 1,000 calls).