A stock has a current price of $60. Each month the price rises by 10% or falls by 5%, with equal probability. The monthly risk-free rate is 1%.

a) Find the current price of a European put option on the stock with two months until expiration and exercise price of $65. (5 points)

b) Consider an option trader who has sold a call option on the stock with exercise price of $58 and two months until expiration. How many shares of stock must he hold at time zero to hedge his option position? (5 points)

c) Describe the parameters of the Black-Scholes option pricing model and whether marginal changes in each parameter affect the price of a call option positively or negatively. (5 points)