Question 1. The Binomial Option Pricing The spot price of SPY is currently $300 (i.e. S0 = $300). The volatility of SPY is 40% (i.e. = 0.40). We are interested in valuing SPY option at the end of 6 months (i.e. t or T = 6/12 = 0.5). The risk-free rate with continuous compounding is 4% per annum (i.e. r = 0.04).

Question 1 - Part (A) [Arbitrage Portfolio Approach] Apply the Arbitrage Portfolio approach with one-step binomial tree and calculate the value of a 6-month European CALL option on SPY with an exercise/strike price of $280 (i.e. K = $280).

Question 1 - Part (B) [Risk-Neutral Valuation Approach] Apply the Risk-Neutral Valuation approach with one-step binomial tree and calculate the value of a 6-month European CALL option on SPY with an exercise/strike price of $280 (i.e. K = $280). Verify that the Risk-Neutral Valuation approach can provide the same result as in Part (A) of Question 2.