Consider a European call option with one-month maturity and a strike price of = $100. The stock price next month will be either $120 or $80. The risk-

free rate is 2% per year.

a) How to replicate the payoff of this option?

b) What should be the price of this option?

c) Suppose you are also considering two other options: one with a strike price of 2 = $80 and the other with a strike price of 3 = $120. Without doing any calculation, which of these three options ( = 80, 100, 120) do you think has the highest delta exposure? (Note: delta exposure means the absolute value of delta).

d) Which of the three options in part (c) one has the highest vega exposure? No calculation is required.

e) How do your answers in (c) and (d) change if the three options are put options?