1. A stock is currently trading at $100. In each one-month period of a binomial tree, the stock will either increase in price by a factor of u = 1.05 or fall by a factor of d = 0.90. The risk-free rate per period of the binomial tree is 0.1668%, i.e., an investment of a dollar at the risk-free rate returns $1.001668 after one period. What is the risk-neutral probability of the stock finishing in the money on a 100-strike, two-month call option?
(a) 0.46
(b) 0.50
(c) 0.89
(d) 0.90
2. A stock is currently trading at $100. In each one-month period of a binomial tree, the stock will either increase in price by a factor of u = 1.05 or fall by a factor of d = 0.90. The risk-free rate per period of the binomial tree is 0.1668%, i.e., an investment of a dollar at the risk-free rate returns $1.001668 after one period. What is the risk-neutral probability of the stock finishing in the money on a 100-strike, two-month call option?
(a) 0.46
(b) 0.50
(c) 0.89
(d) 0.90