R/BC pre/s/ently tra/es on IE/X for $35.32/share. You/ believe /that in th/e next o/ne mi/nute t//he st/ock w/ill /ei/ther i/ncre/ase /by 0.5% or decre/ase by 0.4% with 60% a/d 40% ch/ance respec/tively. A Eur/opean call option on RBC w/ith a strike pri/ce of $35.50 and which expires in one minute is currently trading for $0.01. The ann/ualized risk-fr/ee ra/te is 2% per y/ear an/d the histo/rical an/nual stand/ard deviation of RBC stocks is 30%.

Com/pute th/e Bin/omial valu/e of the c/all opt/ion. Using the i/nformation a/bove regarding yo/ur beliefs arg/ue why the curre/nt price must be wrong.

Us/e/ the B/lack-Sch/oles option /pricin/g formu/la and p/ut-call parity to es/timate /the p/rice of a Euro/pean put opt/ion on RBC that e/xpires one yea/r fro/m now/ and wh/ich/ h/as/ a strik/e pric/e of $35.50.