1. Consider a grant to CEO of 500,000 call options (at-the-money warrants on the firms stock). Assume that the options have 10 years to expiration, the firms stock is currently trading at $63, variance of return on this stock is 0.04 (annualized), and the annual risk-free rate is 3%.

1. Find the value of this grant using a three period binomial tree.

Now redo the valuation in part (a) using probabilities of 0.4 for the up state and 0.6 for down state instead of the risk-neutral probabilities you calculated earlier