During the upcoming year, the stock price of Delinquent Joe Inc. (DJ) is expected to go up to $290 or down to$170 with equal probabilities. The beta of the stock is equal to 0.75. The annual risk free rate is 10.5% and the expected annual return on the market is 16.5%. You are interested in replicating and pricing a European call option on DJ's stock. The option has a strike price of $212 and will mature in one year.

a.What is the current price of DJ's stock?

b.Using the stock and borrowing/lending (at the risk free rate), form a portfolio that will replicate the call option. How many shares of DJ will you buy/sell, and how much money will you borrow/lend?

c.Use the portfolio derived above to price the call option.

d.*What is the beta and expected return of the call option?

e.*Using the result from part(d) show that the price of the call option found in part c) can also be derived by discounting the expected cash flow of the option.