Consider the following one binomial option pricing involving an American call. Assume a stock price currently at RM35 and call option with an exercise price of RM35 and a risk-free rate of 6%. In the next period, the stock can be either increase and decrease by 20%. If the call option is found mispricing, the difference of the price from the correctly priced is RM2.

Required:

a) Is the call price is mispricing?

(8 marks)

b) If the option is overpriced, what the investors can do? Proof that the investors will gain

from this strategy.

(7 marks)