Question: Call option price is $5.83. After each period, there is a 40% chance for the stock price to go up, 25% 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
(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).
current price is S(o)=$60.
1 month = 1 period.