Question: Explain the European call option formula at time 0 based on an n-period binomial option pricing model.
- Options mature after T = 2 years and have a strike price K = $75.
- The price of the underlying stock price is $50. The stock price evolves according to the Jarrow-Rudd specification in this 4-period model with volatility S = 0.3.
- The continuously compounded risk-free interest rate r is 5 percent per year.