4. Option pricing model - Binomial approach Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade call options for Learn Corp., whose stock is currently trading at $20.00. Suppose you are interested in buying a call option with a stron $16.00 that expire in 6 months (Assume that you get the option for freel) Based on speculations and probability analysis, you compute and collea the following information for your price analysis of the option: - For Les options, time until expiration (t) is taken as 0 50 year (6 months/12 months) Lock could go up by a factor of 1.60 (u). - stock could dedine by a factor of 0.75 (0) At this time stopnice in-the-money. You and if you were the option, your payoft would be cercise the option Therefore, the ban Cascate the ending stock price of Learn Cors for both possible outcomes and the payal in both situacions Price Increases Price Decreases Store Investors use options and stocles, based on the range in which a stock is likely to go up or go down to create portfolios that help them generate riskless payoffs. This is called creating a hedge portfolio Suppose you sell one call option on Learn Corps stock to create a riskless hedged portfolio. Your hedge portfolio will love a certain number of shares and a certain value based on the payoff it generates, Based on your understanding of a hedge portfolio and assuming 365 day-based compounding, complete the following steps to mind the value of the aption. (Hint: Please round all answers to four decimal places) Step 1: The total number of shares of LC's stock in the portfolio i Step 2: The payoff from the portfolio if the stock is down is 5 Step 3: If the annual risk-free rate is 596, the current value of the portfoto i the stock is down will be Step 4: The current value of the option of the stocks down is After you find the value of your option, you discuss it with a friend. She says she will use the information you gave her to replicate the option payoffs This is called a replicating portfolio Based on your understanding of replicating portfolios, is the following statement true or false The cost of the repeating portfolio will be equal to the value of the call option or else arbitrage will drive the prices to be equal