STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE. PROVIDE A BRIEF EXPLANATION.

a. In a risk averse world, the binomial model states that, other things being equal, the greater the probability of an up movement in the stock price, the lower the value of a European put option.

b. By observing the prices of call and put options on a stock, one can recover an estimate of the expected stock return.

c. An investor would like to purchase a European call option on an underlying stock index with a strike price of 210 and a time to maturity of 3 months, but this option is not actively traded. However, two otherwise identical call options are traded with strike prices of 200 and 220 respectively, hence the investor can replicate a call with a strike price of 210 by holding a static position in the two traded calls.

d. In a binomial world, if a stock is more likely to go up in price than to go down, an increase in volatility would increase the price of a call option and reduce the price of a put option. Note that a static position is a position that is chosen initially and not rebalanced through time.