BNP Paribas is trading at 44.68 and exhibiting volatility of 35% p.a. You have been asked to write a five-month call on BNP Paribas with a strike of 45.50. It will not pay a dividend over this period. The five-month continuously compounded spot rate is 0.3% p.a. You decide to use a five-step binomial model to value the option:

a. What will you charge for the call?

b. If the stock price rises, falls, rises, rises and rises over the next five months:

i. How would you hedge your option over time?

ii. Would the price you calculated pay for the costs of hedging your position over the period? Please show your calculations

c. If the market price for the option is 0.25 higher, what is the market-implied volatility?