Interest rates are 0. A stock is priced at $4. In each period the stock can double or half in price. Consider a two-period call option with strike of $3.

a) Compute the price of the call option. Show all calculations including the risk neutral probability

b) Compute the replicating portfolio at date 0.

c) If the stock goes up, describe the rebalancing process for the hedge position. Be specific.

d) Use the above lattice of option prices to price a one-period compound option, that allows the holder to buy the call option (computed in (a)) for $1.00.

e) Computer the price of a claim that at date 0 pays out the stock price squared after 2 periods.