1. The stock price of ABC Inc. is currently $100. The stock price a year from now will be either $140 or $90 with equal probabilities. The interest rate at which investors can borrow is 5%. Consider a call option with an exercise price of $100 and an expiration date 1 year from now.

(a) What are the payoffs of the call option year from now?

(b) What is the hedge ratio for this option?

(c) What is the hedged portfolio and what are the payoffs of the hedged portfolio?

(d)Find the premium of the call option