Question: Consider a binomial world in which the current stock price of $80 can either go up by 10 percent or down by 8 percent (i.e.

Consider a binomial world in which the current stock price of $80 can either go up by 10 percent or down by 8 percent (i.e. u is 1.1 and d is 0.92) in one year. The continuous risk-free rate is 4 percent. Assume a one-period world and a call with an exercise price of 80.

* Assuming that the observed marked price of a call is $6.00, what is the annual return on an arbitrage portfolio?

Select one:

a. 7.36%

b. 8.36%

c. 6.36%

d. 12.36%

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