Consider the following data for Microsoft stock.

Stock price = $254

Exercise price of option = $280

For annual Risk-free rate, use the YTM of the 10-year T-bond given in the test

Time to maturity = 2 years

Assume that the stock price can go up or down every year by 20%.

1. Use the 2-state Option Pricing model to find the values of Call and Put options with above specifications.

2. Use the Black-Scholes Option Pricing model to find the values of Call and Put options with above specifications

3. How do these prices compare? Why are the prices different?