Suppose that, in each period, the cost of a security either goes up by a factor of u= 2 or down by a factor d= 1/2.Assume the initial price of the security is $100 and that the interest rate r is 0.

a).Compute the risk neutral probabilities p (price moves up) and q= 1p(price moves down) for this model

b).Assuming the strike price of a European call option on this security is $150, compute the possible payoffsofthecalloptiongiventhattheoptionexpiresintwoperiods. Itmayhelptosketcha diagram of the possible security price movement over two periods.

c).What is the expected value of the payoff of the call option?

d).What should the no-arbitrage price of the call option be?