The current price of AmericanAirlines stock is $6. In the next year, this stock price can either go up by $3.50 or go down by $2. The stock pays no dividends. The one- year risk-free interest rate is 3% and will remain constant.

1. Calculate the risk-neutral probabilities.
2. Use the risk-neutral probabilities you found in part a) to calculate the price of a one-year call option on American Airlines stock with a strike price of $7.