The share price ($) of NIT Ltd evolves from time 0 to time 1 following a binomial process as follows.

A one year European call option on NIT is currently traded at $1.3. The strike price of the option is $10 and the risk free interest rate is 5% p.a. Which of the following statement is CORRECT?

Select one:

a. To replicate the cash flow of the call option, investor should construct a portfolio containing 0.6 shares and borrow $4.57 at the risk free interest rate.

b. To replicate the cash flow of the call option, investor should construct a portfolio containing 0.75 shares.

c. The option is overvalued in the market.

d. The fair value of the option is $1.23

e. The risk neutral probability for the share price to increase is 25%

0 1 13 10 88