Call option

call option expires in three months and has a strike price X = $40. The underlying stock is worth $45 today. In three months, the stock may increase by $7 or decrease by $6. The risk-free rate is 5% per year. Use the binomial option-pricing model to value the call option. Round your answer to the nearest cent.6946042Solution49 + 9h = 36 + 0hSo, h = -13/9.Buying 1 share and selling 13/9 calls gives a risk-free payoff of 36 in threemonths.The PV of this now is 35.82, so 35.82 = 42 – 13/9CAnd,…