A stock is currently trading at $10. Tomorrow there is a 40% chance it will trade at $12 and a 60% it will trade fat$9. Ignore the time value of money, so r=0.

A.) What is the value of a call option on that stock that expires tomorrow with an exercise price of $11? (Use the method we used in class)

B.) What is the expected value of the call option?

C.) What is the value today of a binary put option on that stock that expires tomorrow with an exercise price of $10?

D.) What is the value today of a straddle (a call plus a put) on that stock that expires tomorrow with an exercise price of $10. How many stocks do you short?

E.) If calls were priced at $2/3 and puts at $4/7 what would you do to make money from what you learned in Part D? Explain your method clearly.