ECONOMICS QUESTION

In a discreet, two-period, perfectly efficient market, a stock is selling for $1 per share. In each

of the two one-year periods in this economy, the stock’s price will either double or drop in price

by 40%. All riskless bonds will yield 10% each year; that is, the yield curve is flat. You may

assume that markets are efficient and allow for no-arbitrage pricing. What is the time-zero (now)

no-arbitrage market value of a 2-year call in this economy if its exercise price equals 2? (please show the steps by diagram)