3. Consider a one-step binomial tree for Amazon stock with a current stock price of $200 that can go either up to $220 or down to $180 in 6 months. Assume zero interest rates and no dividends.

1) Consider a 6-month European call option with a strike of $210, and compute its terminal

the payoff on the tree.

2) Suppose you want to replicate the payoff of the option with the 6-month bond and the stock. Compute the replicating portfolio weights (shares of stocks and bonds)

3) Whats the delta of the option?

4) Suppose the market maker makes a quote for the call option with strike price $210 at $9 (with zero bid-ask spread). What trade do you propose to make to lock in a profit based on the tree?

5) Suppose 6 months later, the stock price goes to $220, what will be the terminal payoff from your above trade?