[Binomial Option Pricing] The spot price of SPY is currently $100 (i.e. S0 = $100). The volatility of SPY is 30% (i.e. ? = 0.30). We are interested in valuing SPY option at the end of 1 year (i.e. ?t or T = 1). The risk-free rate with continuous compounding is 4% per annum (i.e. r = 0.04).
Part A. [Arbitrage Portfolio Approach] Calculate the value of a 1-year European Call option on SPY with an exercise/strike price of $80 (i.e. K = $80). Use Arbitrage Portfolio approach with one-step binomial tree.
Part B. [Risk-Neutral Valuation Approach] Verify that the Risk-Neutral Valuation approach can provide the same result as in Part 1