Question: Consider a one-period, two state case in which XYZ stock is trading at So=$35, has u of 1.05and d of 1/1.05, and which the period

Consider a one-period, two state case in which XYZ stock is trading at So=$35, has u of 1.05and d of 1/1.05, and which the period risk-free rate is 2%.

a. Using the BOPM, determine the equilibrium price of an XYZ 35 European call option expiring at the end of the period.

b. Explain what an arbitrageur would do if the XYZ 3 European call was priced at $1.35. Show what arbitrageurs cash flow would be at expiration when she closed.

c. Explain what an arbitrageur would do if the XYZ 35 European call was priced at $1.10. Show what arbitrageurs cash flow would be at expiration when she closed.

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