Problem 1 (use of risk-neutral probabilities to price a call option) Consider the 3-step binomial model below: Initially, the present stock price p is 100. At each time-step, the stock price will either move up or down by A=10. Use the methodology based on risk-neutral probabilities to set a fair present price of a corresponding call option, with strike price K = 80 and expired at time-step 3. Assume interest rate r = 0. P + A p-A stock P+2A P-2A P+3A p+A P-A P-3A

Problem 1 (use of risk-neutral probabilities to price a call option) Consider the 3-step binomial model below: - Initially, the present stock price p is 100. - At each time-step, the stock price will either move up or down by =10. Use the methodology based on risk-neutral probabilities to set a fair present price of a corresponding call option, with strike price K=80 and expired at time-step 3 . Assume interest rate r=0