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You are given the following regarding stock of WWW

i) The stock is currently selling for 50

ii) One year from now the stock will sell for either 40 or 55

iii) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 10%

iv) The continuously compounded risk-free interest rate is 5%

When reading the Financial Post, you notice that a one-year at-the-money European call written on stock WWW is selling for 1.90. You wonder whether this call is fairly priced.

You use the binominal option pricing model to determine if an arbitrage opportunity exists. What transactions should you enter to take advantage of the arbitrage opportunity (if one exists)?

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A) No arbitrage opportunity exists

B) Short shares of WWW, lend at risk-free rate, and buy the call priced at 1.90

C) Buy shares of WWW, borrow at risk-free rate, and buy the call priced at 1.90

D) Buy shares of WWW, borrow at risk-free rate, and short the call priced at 1.90

E) Short shares of WWW, borrow at risk-free rate, and short the call priced at 1.90