Consider the following one binomial option pricing involving an American call. Assume a stock price currently at RM110 and call option with an exercise price of RM110 and a risk-free rate of 7%. In the next period, the stock can be either increase and decrease by 15% and 10% respectively.

Required:

1. Proof if the call price is mispricing?

(8 marks)

(CLO2:PLO2:C4)

b) How the overpriced options (mispricing) can be equally to the market price?

(4 marks)

(CLO2:PLO2:C5)