What are the pseudoprobabilities of the up and down movement

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Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The risk free rate over the period is 10% given annual compounding. [Let r denote the continuously compounded rate per year. Thus er×1 = 1.1.] A American call option on the stock with an exercise price of $75 matures in one period (1 year). If you want to price the option with a one-step binomial tree. Please show work

Problem 1: What are u and d?

Problem 2: What are the payoffs from the call in each state of the world?

Problem 3: What is the European call price at time 0?

Problem 4: What are the pseudoprobabilities of the up and down movements in the stock price?

Reference no: EM132885247

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