A share of stock in MagnumOpus, Inc. is $54 per share. It is equally probable that MagnumOpus shares will sell for $50 or $62 per share in 30 days.

a. Suppose that the strike price on a 30-day call option is $55. What is the price of a call option if the cost of borrowing (interest rate)

to finance the purchase is zero?

b. How is the price of a call option affected if the strike price increases to $56?

c. Suppose the strike price is $56. How will the price of a call option be affected if it is equally likely that MagnumOpus shares sell for

$48 or $65 in 30 days?

d. How is your answer to part c affected if the interest rate is 5 percent?

e. Consider the situation in part

b. What is the price of the call option if the probability of a low price after 30 days is pL =