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Call option is $7.89. After each period, there is a 45% chance for the stock price to go up, 20% chance to stay the same, and 35% chance to go down. Assume μ is the same as the risk-free rate.
(a) Find the up-factor u and down-factor d = 1/u that satisfy E[S(1)] = 1 + μ?t.
(b) Find the corresponding risk-neutral probabilities q1, q2, q3 for the u and d above.
(c) Evaluate the option price using the risk-neutral probabilities from (b).
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