Question 1 Find the correct answer for both a & b. (Just answer needed no solution)

a.Consider a binomial world in which the current stock price of $80 can either go up by 10 percent or down by 8 percent (i.e. u is 1.1 and d is 0.92) in one year. The continuous risk-free rate is 4 percent. Assume a one-period world and a call with an exercise price of 80.

* Assuming that the observed marked price of a call is $6.00, what is the annual return on an arbitrage portfolio?

Select one:

a.8.36%

b.12.36%

c.6.36%

d.7.36%

b. Consider a binomial world in which the current stock price of $80 can either go up by 10 percent or down by 8 percent (i.e. u is 1.1 and d is 0.92) in one year. The continuous risk-free rate is 4 percent. Assume a one-period world and a call with an exercise price of 80.

How many shares would be needed to fully hedge a short position in 100 calls?

Select one:

a.33.34

b.44.45

c.55.56

d.66.67