Problem to be distributed February 16th due Tuesday February 21st at beginning of class on paper. Assume that S=200 now and three months from now it is either 250 or 160. The values here are not symmetric. First draw the diagram. If the exercise price of a call option is 210 and the interest rate is .06 find the replicating portfolio and then find the value of the call option. This problem is about calibration. It does not involve pricing an option. The length of time is h and the sigma is a. TO find u we use u = e^rh+ and for d we use = e^rh - sigma h. So assume that S=120, r=.06, h= 1/4 and sigma=.30. Find u and d. Then find uS and dS. Note the result will not be symmetric. The formula is 10.11 on page 287