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

**Individual Portion**

Individually conduct research on two different models used to price call options. Detail each model in a Word document and focus on comparing and contrasting the models. Post your document to the Small Group Discussion Board.

**Group Portion**

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

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

- Find the stock price sequence.
- Determine the possible prices of the call at expiration.
- Find the possible prices of the call at the end of the first period.
- What is the current price of the call?
- What is the initial hedge ratio?