A stock currently has a market value of $10. The risk-free rate of return is 3%. In one year, the stock is expected to sell for either $14 or $9.

a) What is the value of a twelve-month call option with a strike price of $12? (6 points)

b) If the twelve-month call option is traded at $1.2, Recommend a riskless strategy by showing the positions in both shares and calls. (4 points).