A non-dividend paying stock currently trades at a price of $25. European and American call and put options on the stock with a time to expiration of 180 days have an exercise price of $26. You forecast that the stock price can go up 5% or down 4% in each period of length 90 days each. The annually compounded risk free rate is 3%. Use the two-period BOPM. Use this information to answer this and the next 5 questions. The risk-neutral probability that the stock price will go down in each period of length 90 days is closest to:

a. 0.5256

b. 0.2222

c . 0.4744

The value of the European call option is closest to:

a. $0.53

b. $0.63

c. $0.43

Which of the following is correct regarding the value of the American call option?

a.It is greater than that of the European call option

b. It is less than that of the European call option

c. It is equal to that of the European call option

The value of the European put option is closest to:

a. $1.45

b. $1.05

c. $1.55

Which of the following is correct regarding the value of the American put option?

a. It is less than that of the European put option

b. It is equal to that of the European put option

c.It is greater than that of the European put option

Which of the following is the correct position in the stock to hedge a short position in 100 European call options at the initial date?

a. Buy 36.24 shares of stock

b. Short-sell 36.24 shares of stock

c. Buy 72.49 shares of stock