(Answered) You are given the following information concerning a stock

Finance

You are given the following information concerning a stock denoted by St

(1) Current value =102.

(2) Annual volatility = 30%.

(3) You are also given the spot rate r = 50%, which is known to constant during the next 3 months

It is hoped that the dynamic behavior of St can be approximated reasonably well by a binomial process if one assumes observation intervals of length 1 month

(a) Consider a European call option written on St. the call has a strike price K = 120 and expiration of 3 months. Using St and the risk-free borrowing and lending, Bi, construct a portfolio that replicates the option.

(b) Using the replicating portfolio price this call

(d) Suppose the market price of this call is 5. How would you form an arbitrage portfolio?

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