1. Consider a portfolio of a stock and a short call option with the following properties.

A. Stock price is currently $30.

B. In 3 months, it will be either $32 or $28.

C. Call option expiration is 3 months. The strike price is $31.

• Draw the binomial tree of payoffs.

• What is the number of shares which makes the portfolio risk-free? (Answer can be less than one share)

• What is the value of the option today?

• What is the risk-neutral probability value?

• Find the value of the option using this risk-neutral probability. (Show the equation, too)