Consider a one-period (1 year) binomial model in which the underlying is at 65 and can go up 30 percent or down 22 percent. The risk-free rate is 8 percent. Assume that the call is selling for $9 in the market. Determine the price of a European call option with exercise prices of 70 and calculate the rate of return of arbitrage transaction. Use 10,000 call options.

a.

$7.00 & 10.41%

b.

$6.75 & 12.78%

c.

$7.75 & 15.17%

d.

$9.50 & 9.53%