Let the standard deviation of the continuously compounded return on the stock be 20 percent.

Ignore dividends. Respond to the following:

a. What is the theoretical fair value of the October 165 call. Calculate this answer by

hand and then re-calculate it using BlackScholesMertonBinomial10e.xlsm.

b. Based on your answer in part a, recommend a riskless strategy.

c. If the stock price decreases by $1, how will the option position offset the loss on the

stock?