Find the price of a 1-year call option for 1 Pound with the strike price of 1.77 $/Pound if today's spot rate is 1.7$/Pound, next year it can either go up to 1.9$/Pound (with 67% probability) or go down to 1.6$/Pound (with 33% probability). The interest rates in U.S. and U.K. are 4% and 7% respectively.

Answer: $0.0218

I would like to know step-by-step how I would come to the answer here.

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Call-Put Parity What if strikes for call and put are equal to each other but not equal to the forward price? Consider the following strategy: Long Forward (forward price F), short call, long put (both with strike price X) Today: get $(C-P) At time T: pay $(F-X) Thus, C-P=(F-X)/(1+r)^T Trading Strategies Involving Options 5-2 Using Options Calls Long Short Options Long Short Puts Why do we need to know trading strategies? Options are \"flexible\