Binomial trees.
A stock price is currently $50. It is known that at the end of six months it will be either $60 or $42. The risk-free rate of interest with continuous compounding is 12% per annum. Calculate the value of a six-month European call option on the stock with an exercise price of $48. Verify that no-arbitrage arguments (i.e., arguments based on a riskless portfolio) and risk-neutral valuation arguments (i.e., arguments based on risk-neutral probabilities) give the same answer.