5. The Binomial Option Pricing Model (4 points for part A, 10 points for B and 10 points for C ) A) Which of the following statements is FALSE? i) A replicating portfolio is a portfolio of other securities that has exactly the same value in one period as the option. ii) By using the Law of One Price, we are able to solve for the price of the option as long as we know the probabilities of the states in the binomial tree. iii) The binomial tree contains all the information we currently know: the value of the stock, bond, and call options in each state in one period, as well as the price of the stock and bond today. iv) The idea that you can replicate the option payoff by dynamically trading in a portfolio of the underlying stock and a risk-free bond was one of the most important contributions of the original Black-Scholes paper. Today, this kind of replication strategy is called a dynamic trading strategy. Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. B) Using the binomial pricing model, what is the calculated price of a one-year call option on KD stock with a strike price of $20 to the nearest penny? C) Using the binomial pricing model, what is the calculated price of a one-year put option on KD stock with a strike price of $20