You observe a 50 price for a non-dividend-paying stock. The call option has two years to mature, the periodically compounded risk-free interest rate is 5%, the exercise price is 50, u = 1.356, and d = 0.744. Assume the call option is European-style.

Required:

a)Compute the probability of an up move based on the risk-neutral probability

(4 marks) b)Compute the current call option value (6 marks)

1. Determine the current put option value (6 marks)
2. Explain four advantages the option valuation method you have used here (4 marks)