Q1. Consider a two period Binomial Model. If the current stock price of $100 and the risk free rate is 4%. For each period the stock can go up by 15% and down by 15%. The exercise price of this call option is $98.

A) Find the sequence of stock prices for the two periods?

B) Find the value of call at the end of first period and the value of call at the end of second period (that is show the Call Price Path) for the two period model. Why is there a difference in the value of call?

C) What is the initial hedge ratio and what is the hedge ratio at period 1.

D) Find the Value of Call at time period 0 or today using two period binomial model?

E) Please show that the Dynamic hedge works. Use the value of the portfolio for the two periods to illustrate the concept of risk-neutral pricing? What does investor earn? Use suitable examples.

F) What strategy investor can you use if the call is overpriced/underpriced.