A stock starts at time t = 0 with a value $100 and, at each time step, the stock can go up $40 or down $20. Suggest three time steps and a European call with a strike price $150.
1. Sketch the stock process.
2. Sketch the option process and nd value of option.
3. Suppose that the stock first goes up and then down. Explain your hedging strategy and show that you are risk-free.