Consider a one-period binomial model in which an equity stock is currently trading for $70 and can go up 30 percent or down 20 percent. The risk-free rate is 10 percent. Determine the price of a European call option with exercise prices of 70. Assume that the call is selling for $10 in the market and you have 10000 calls. Which of the following well describes what should be done today in terms of taking arbitrage transactions or not?

a.

There is an arbitrage opportunity which could be exploited today by taking the following transactions: long options in the amount of $100,000; sell $100,000 worth of stocks; and invest $100,000 earned from selling the stock at the risk free rate.

b.

There is no arbitrage opportunity, and the call is fairly prices. Therefore, no transactions are necessary and arbitrage profit cannot be earned.

c.

There is an arbitrage opportunity which could be exploited today by taking the following transactions: Short options in the amount of $100,000; and borrow $100,000 at the risk free rate to buy $100,000 worth of stocks.

d.

There is an arbitrage opportunity which could be exploited today by taking the following transactions: Long options in the amount of $100,000; sell $420,000 worth of stocks; and invest $320,000.

e.

There is an arbitrage opportunity which could be exploited today by taking the following transactions: Short options in the amount of $100,000; Buy $420,000 worth of stocks; and borrow $320,000.