Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common stock, with a strike price of $70 and one year until expiration. Currently, the company’s stock sells for $74 per share. In one year, the stock will be trading at either $85 per share or $59 per share. Ken is able to borrow and lend at the risk-free EAR of 5.5 percent.

a. What should the call option sell for today?

b. If no options currently trade on the stock, is there a way to create a synthetic call option with identical payoffs to the call option described above? If there is, how would you do it?

c. How much does the synthetic call option cost? Is this greater than, less than, or equal to what the actual call option costs? Does this make sense?