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PLEASE NOTE: I POSTED THIS QUESTION BEFORE BUT I WAS NOT ENTIRELY SATISFIED WITH THE ANSWER PROVIDED. I AM LOOKING FOR A FRESH ATTEMPT. HERE

PLEASE NOTE: I POSTED THIS QUESTION BEFORE BUT I WAS NOT ENTIRELY SATISFIED WITH THE ANSWER PROVIDED. I AM LOOKING FOR A FRESH ATTEMPT. HERE IS THE QUESTION:

Question 1b 2016

Part (ii) A stock currently trades at a price of $20. The stock can go up by 15% and down by 10%. The risk-free rate is 2.5%. The time to maturity is 1 year. a) Use a one period binomial model to calculate the price of an American call option with an exercise price of $18. (8 marks) b) Suppose the call is currently trading at $3.5. Is there an arbitrage and how can you exploit it using 1000 call options? (9 marks)

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