ABC Corp. stock currently sells for $70 per share. One year from today the stock will be worth either $95 or $65 per share with probabilities 45% and 55% respectively. One-year T-bill currently yields 5%.

a) Whats the expected return of the ABC stock?

b) What is the fair value of a European call option on ABC stock with one year to expiration and a $75 exercise price?

c) Describe a portfolio that perfectly replicates this call option.

d) Suppose the call option is trading for $5. Carefully describe what you would do.