Question 1 (15 points) Suppose a call option on an underlying asset valued at $30 a share today is offered starting today (time t = 0). The volatility of the underlying asset for the time period from today to 1 year from now is 10%. If the call option carries a strike of $28 and expires in 1 year, and if the interest rate r remains at 3% over this period of time, price the option to two decimal places using (draw trees for CRR): (a) (5 points) single-period CRR (b) (5 points) two-period CRR (C) (5 points) Black-Scholes Question 2 (10 points) For the call option in Question 1, determine the replicating portfolio for the seller in the single-period CRR model. (a) (5 points) What amount does the seller borrow at the risk-free rate to replicate the option? (b) (5 points) How many shares of stock does the seller purchase to hedge away risk? Question 3 (10 points) For the call option in Question 1, suppose the value of the underlying asset goes down by 25 cents. Using the Black-Scholes pricing formula, determine (a) (5 points) the exact change in the price of the call option. (b) (5 points) the approximate change in the price of the option using the delta of the option. Note: Drops should be indicated by negative values. Rises should be indicated by positive values