Question: Consider a one period binomial Model in which the underlying stock price is BD: 110 and can go up to 30% or down by 20%.

Consider a one period binomial Model in which the underlying stock

Consider a one period binomial Model in which the underlying stock price is BD: 110 and can go up to 30% or down by 20%. The risk free rate is 6%, 1. Evaluate the price of the European call option with an Exercise price of BD: 112 and analyze whether it is over priced or under-priced 2. Calculate the theoretical fair value of the call and hedge portfolio. Assume that the call is selling for BD: 18 in the market. Suggest how to execute an arbitrage transaction and find out rate of return. Use 10000 call option. Consider a one period binomial Model in which the underlying stock price is BD: 110 and can go up to 30% or down by 20%. The risk free rate is 6%, 1. Evaluate the price of the European call option with an Exercise price of BD: 112 and analyze whether it is over priced or under-priced 2. Calculate the theoretical fair value of the call and hedge portfolio. Assume that the call is selling for BD: 18 in the market. Suggest how to execute an arbitrage transaction and find out rate of return. Use 10000 call option

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