1. Consider a one period binomial model. The initial stock price is $30. Over the next 3 months, the stock price could either go up to $36 (u = 1.2) or go down to $24 (d = 0.8). The continuously compounded interest rate is 6% per annum. Use this information to answer questions below. Consider a call option whose strike price is $32. How many shares should be bought or sold and how much money should be deposited or invested to replicate the payoff of the call option?

A.Buy0.4667 shares, Y = -$7.88 (borrow)

B.Buy0.3333 shares, Y = -$7.88 (borrow)

C.Buy0.6536 shares, Y = -$8.72 (borrow)

D.Buy0.4328 shares, Y = -$8.72 (borrow)

E.None of the above

2) What is the price of the call option?

A.$2.12

B.$2.76

C.$3.18

D.$3.24

E.$4.12

3) What is the risk-neutral probability that the stock price would be $36?

A.0.538

B.0.362

C.0.682

D.0.493

E.0.551

4) What is the expected payoff of the call option (after 3 months) using risk neutral probabilities?

A.$5.65

B.$4.93

C.$3.82

D.$2.15

E.None of the above

5) Suppose you wish to form a risk free portfolio by selling a call and buying a certain number of shares. How many shares should be bought for every call sold?

A.0.6240

B.0.5813

C.0.4212

D.0.3333

E.0.2128