The one-year and two-year risk-free rates (yields) are 1% and 1.025%, respectively. Our model of the term structure says that one year from now the one-year interest rate will be one of the following two values: 0.01 or 0.01u, where u is the up factor. Here, the rates are the effective annual rates, so that one dollar invested in a T-bond returns (1+r)^T dollars, where T is measured in years. The model also says that the risk-neutral probability 1p of the one-year interest rate being 0.01u equals to 2/3.

Enter the price of the one-year European call option written on the two-year risk-free zero coupon bond paying 100 at maturity, with strike price 98.97: