Question 4 (a) Consider the following two strategies Strategy 1: short one call option with the price X + Za, short one can option with strike price X - Za, and long two call options with strike price Strategy 2: long two put options with strike pricex.ston ne put option with strike price X - 20, and short one put option with strive price X + 20 Both strategies are based on the same undenying non dividend paying stock and a options are European and have the same maturity date, T Both X and a are positive constants, X - 2a > 0, and the stock price today is equal to X Which strategy has the higher cost to implement today? You must use a payoff table at maturity to comprehensively justify your answer stating any assumptions (9 marks) ii. Why would a trader use these strategies? [2 marks) (b) Comment on the validity of the following statement. The risk neutral prog approach makes no assumptions about the nature of investors' nisk preferences (3 marks) (c) Consider a two-period binomial model (t = 0, 1, 2), with a nisky non-dividend paying stock, BHP, which is currently trading for $4. In each period, the stock can go up by 20% or down by 5%. The risk-free interest rate for the second period (e. between = 1 and t = 2) is 2% An at-the-money European put option on BHP with maturity date t = 2 is currently trading at $0 20715. What is the implied risk-free interest rate for the first period in this economy (5 marks) 11 Using the replicating portfolio method, determine the value today of a European call option on BHP stock with maturity date t = 2 and exercise price of $3.85