Consider the following binomial tree for 3 months. Consider a European call option on this stock, where the time-to-maturity is 3 months and the risk free rate is assumed to be constant at 5% per annum with continuous compounding.

(a) Calculate the price of the 3-month at-the-money call option using one-step binomial option pricing model. (Hint: T=0.25, r=0.05, K=280.)

(b) Calculate the price of a call option by taking the stock price as a numeraire asset. (Hint: Bt St must be a martingale under QS measure, where B is the bond price.)

(c) Discuss the results above by comparing the answers in (a) and (b).