B2 (a) A stock's current price is 100. There are two possible prices at the end of the year: 150 or 75. A call option to buy one share at 100 at the end of the year sells at 20. Suppose that you are told that a riskless portfolio can be created by selling 3 call options, buying 2 stocks today and borrowing 140 today. What is the risk free interest rate? [8] (b) A stock price St follows geometric Brownian motion with drift u = 3 and volatility o= 2. Assume that So = 25 and that the risk-free interest rate is 10% with continuous compounding. A derivative based on this stock will provide a payoff at expiration time T = 1 year of 5 if ST 40. The payoff is zero if 30