Suppose that firm D's shares are currently selling for $50. After six months it is estimated that the share price will either rise to $54.25 or fall to $46.50. If the share price rises to $54.25 in six months, six months from that date (1 year from today) the price is estimated to either rise to $58.86 or fall to $50.45. If the share price falls to $46.50 in six months, six months from that date (1 year from today) the price is estimated to either rise to $50.45 or fall to $43.25. The six month risk free rate is 2.5%.

Based on the tree diagram of stock prices, what is the risk neutral probability of a share price increase over either six month subperiod?

Based on the two stage binomial model, what should be the value today of a call option with exercise price $55 that expires in one year?