(1)Suppose a stock is worth is $50 today and in one period will either be $60 or $40. The risk-free rate is 5%.

(a)Design a portfolio to replicate the payoff of an at-the-money call option in one period. What is the value of this option?

(b)If this call option sells at $5 is there any arbitrage opportunity? If yes, design a strategy to profit from this arbitrage opportunity?

(c)What is the probability that the stock prices go up to $60 in one period?