Stock A is currently traded at $100. Each year, the stock price can either go up by 10% or drop by 10%. Your manager asks you to price an European call option with a strike price of $85 and a maturity of two years from now. The YTM of a one-year zero Treasury bond is 4% and the forward rate from year one to year two is 6%.

Suppose the discount rate you use is 5% for the second period. To create the replicating portfolio for the second year, how many shares should you trade if the stock price goes up by 10% during the first year?

Group of answer choices

0

0.78

1.00

Cannot be determined because the probability for the stock price to move up/down is not given for the second year.