Tom Curtis has prepared a hypothetical problem for you and your groupto solve. He wants you to utilize the two-period binomial optionpricing model to solve certain problems. If your team passes this test,you might soon be developing derivative strategies for RicardoInternational to use.

Individual Portion – 700 words

Individually conduct research on two different models used to pricecall options. Detail each model in a Word document and focus oncomparing and contrasting the models. Post your document to the SmallGroup Discussion Board.

Team work – 1500 words

As a group, combine your efforts to solve the following:

Consider a two-period, two-state world. Let the current stock pricebe $35 and the risk-free rate be 5%. In each period, the stock price caneither go up by 10% or down by 10%. A call option expiring at the endof the second period has an exercise price of $30.

1. Find the stock price sequence. Explain. (300 words)
2. Determine the possible prices of the call at expiration. Explain (300 words)
3. Find the possible prices of the call at the end of the first period. Explain (300 words)
4. What is the current price of the call? Explain (300 words)
5. What is the initial hedge ratio? Explain (300 words)