1. Consider a single period CRR model with = $100, = $200 or $50, r = 0.25.

(a) Find the arbitrage free initial price of a European call option for one share of stock where the strike price is K = $100 and the exercise time T = 1.

(b) Find a hedging strategy that replicates the value of the option described in (a).

(c) Suppose the option in (a) is initially priced at $1 above the arbitrage free price. Describe a strategy (for trading in stock, bond and the option) that is an arbitrage.

(d) What is the arbitrage free initial price for a put option with the same strike price and exercise time as the call option described in (a)?