30. Two-State Option Pricing Model Kate is interested in buying a European call option written on EastJet Airlines Ltd., a nondividend paying common stock, with a strike price of $75 and one year until expiration. Currently EastJets stock sells for $78 per share. Kate knows that in one year EastJets stock will be trading at either $93 per share or $65 per share. Kate can borrow and lend at the risk-free equivalent annual rate (EAR) of 2.5 percent.

a) What should the call option sell for today?

b) What is the delta of the option?

c) How much would Ken have to borrow to create a synthetic call?

d) How much does the synthetic call option cost? Is this greater than, less than, or equal to what the actual call option costs?