Answer only PART B

Problem 2 (continued) B. What is the cost of the covered call portfolio? What will be the payoff and profit on the covered call portfolio at a stock price of $140? (12 points) Problem 2 (24 points) You would like to be holding a covered call position on the stock XYZ. The stock XYZ is currently selling for $120. Over the next year, the stock price will either increase by 10% or decrease by 10%. The exercise price of the call option is $125. The risk free interest rate is 3% per year. A. What is the price of the call option? (Use a one-period binomial model) (12 points)