The current spot price of a stock is $100 per share, and the risk-free rate is 5%. The stock pays no dividends and costs nothing to store. The forward price is $105. Each period the stock price cither doubles (u=2) or halves (d=1/u=0.2) Consider a long call position with a strike of $110. If the price increases (S0=S100,S1=S200), then the call pays off ninety dollars (Cu=$90). If the price decreases (S0S100,S1=S50), then the call pays off zero (CDSO). 8. Draw the tree for the call. 9. Confirm these are the equations to replicate the payoff. Solve for the number of shares () and the number of bonds (B) to replicate the payoff. $90=$200+B$1.05$0=$50+B$1.05 = (this will be ai fraction) B= Determine the cost of the replicating portfolio. This is the premium of the option. Callpremium=$100+B+$1= (must be a positive dollar amount) 10. Use the call premium you calculated for question 9 to determine the "risk-neutral probability (q)" by solving the following equation. (1+5%)q$90+(1q)$0=Callpremiumfromquestion9 The current spot price of a stock is $100 per share, and the risk-free rate is 5%. The stock pays no dividends and costs nothing to store. The forward price is $105. Each period the stock price cither doubles (u=2) or halves (d=1/u=0.2) Consider a long call position with a strike of $110. If the price increases (S0=S100,S1=S200), then the call pays off ninety dollars (Cu=$90). If the price decreases (S0S100,S1=S50), then the call pays off zero (CDSO). 8. Draw the tree for the call. 9. Confirm these are the equations to replicate the payoff. Solve for the number of shares () and the number of bonds (B) to replicate the payoff. $90=$200+B$1.05$0=$50+B$1.05 = (this will be ai fraction) B= Determine the cost of the replicating portfolio. This is the premium of the option. Callpremium=$100+B+$1= (must be a positive dollar amount) 10. Use the call premium you calculated for question 9 to determine the "risk-neutral probability (q)" by solving the following equation. (1+5%)q$90+(1q)$0=Callpremiumfromquestion9