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Problem 2 We are given the following facts about three financial securities, namely, a bond B, a stock S, and a call option : 1. Let S be a stock with current price of $100. One year later, the expected price of the stock is $130 in the up state and $90 in the down state. 2. Let B be a bond that is currently selling at $20 and one year later the price will be $21 with certainty. 3. Let C be a call option with underlying stock S, that is, this call option derives its value from S. The strike price on C is $110 and the contract will expire in 1 year Use the binomial option pricing model to find the price of this call option C: (i) by constructing a synthetic portfolio P and pricing it. (ii) by extracting risk-neutral probabilities. Problem 2 We are given the following facts about three financial securities, namely, a bond B, a stock S, and a call option : 1. Let S be a stock with current price of $100. One year later, the expected price of the stock is $130 in the up state and $90 in the down state. 2. Let B be a bond that is currently selling at $20 and one year later the price will be $21 with certainty. 3. Let C be a call option with underlying stock S, that is, this call option derives its value from S. The strike price on C is $110 and the contract will expire in 1 year Use the binomial option pricing model to find the price of this call option C: (i) by constructing a synthetic portfolio P and pricing it. (ii) by extracting risk-neutral probabilities