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Activision stock is currently trading at $165. Assume that Activision stock can go up by 8% (U = 1.08) or down by 5% (D = 0.95) in each period (1-month). The risk free rate is 2% annual (r = 1 + 2%/12). The exercise price of call and put options considered on Activision stock is $165. Estimate the following:

a. Develop a 2-period (2-month) stock price, call and put pay-offs in the possible states (Binomial)

b. Compute Activision 2-Month Call Option Price today (Binomial)

c. Compute Activision 2-Month Put Option Price today (Binomial)

d. Show that the Put-Call Parity works

e. Activision 2-Month call option maturing in two months is now trading at $11 with an implied volatility of 40%. If the historical observed volatility of Activision is 26%, provide a trading recommendation for this Activision Call Option with your rational