A non - dividend paying stock, currently priced at 140, is expected to go up by 10% or go down by 10% over a period. The risk free rate for one period is 4%.

a) Build a 1-period tree of stock prices.

b) Price a call option with strike of $120 using the binomial pricing model.

c) Calculate and explain the hedge ratio that makes risk - neutral pricing possible. Demonstrate the value of the hedge portfolio shorting 1000 call

options currently and both when the stock price goes up and goes down.