You are given the following regarding stock of Widget World Wide (WWW):

(i) The stock is currently selling for $50.

(ii) One year from now the stock will sell for either $40 or $55.

(iii) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 10%.

The continuously compounded risk-free interest rate is 5%.

While reading the Financial Post, Michael notices that a one-year at-the-money

European call written on stock WWW is selling for $1.90. Michael wonders whether this call is fairly priced. He uses the binomial option pricing model to determine if an arbitrage opportunity exists.

What transactions should Michael enter into to exploit the arbitrage opportunity (if one exists)?

(A) No arbitrage opportunity exists.

(B) Short shares of WWW, lend at the risk-free rate, and buy the call priced at $1.90.

(C) Buy shares of WWW, borrow at the risk-free rate, and buy the call priced at $1.90.

(D) Buy shares of WWW, borrow at the risk-free rate, and short the call priced at $1.90.

(E) Short shares of WWW, borrow at the risk-free rate, and short the call priced at $1.90.