5. Additive Drift and Volatility Suppose the interest rate is 10%. Suppose a stock sells for $100 today. >From historical experience we guess that the additive volatility of the stock is 20%, and that the drift of the stock is 10%. If the stock can take on only two values tomorrow, then we would guess they would be 100+(10%*100)+(20%*100) = 130 if and up and 100+(10%*100) (20%*100) = 90 if down. (a) If we believed that the volatility is indeed 20% and the drift 10%, what would the value of a one period call option with strike price of 110? (b) Suppose that we thought the drift should be 11%. What would our valuation of the same call option be in that case (c) Suppose that we are sure the drift is 10%, but we think the volatility is 21%. Now what would the value of the call option be? (d) Does the call option depend more on the drift or on the volatility? 5. Additive Drift and Volatility Suppose the interest rate is 10%. Suppose a stock sells for $100 today. >From historical experience we guess that the additive volatility of the stock is 20%, and that the drift of the stock is 10%. If the stock can take on only two values tomorrow, then we would guess they would be 100+(10%*100)+(20%*100) = 130 if and up and 100+(10%*100) (20%*100) = 90 if down. (a) If we believed that the volatility is indeed 20% and the drift 10%, what would the value of a one period call option with strike price of 110? (b) Suppose that we thought the drift should be 11%. What would our valuation of the same call option be in that case (c) Suppose that we are sure the drift is 10%, but we think the volatility is 21%. Now what would the value of the call option be? (d) Does the call option depend more on the drift or on the volatility