The stock of JCH is currently trading at $100 per share. Over the next year there is a true or actual probability of 70% that the stock will increase by 20% in value and a 30% probability that it will decrease in value by 10%. Over the next year JCH will not pay a dividend. The annual risk-free rate is 2%.

(a) What should be the price of a one-year European call option with one year to maturity and strike price of $108? (b) Suppose the option in part 4a is trading at the price you calculated. What is the expected return to holding this call option over the next year? Is this higher or lower than the expected return to holding the stock of JCH? What explains any difference? (c) Suppose that the option in part 4a is trading at $6. Could you exploit this price? If so explain how. (d) For this part, lets drop the binomial assumption so that we dont assume that stock prices can on take on just two values next year. We do continue to assume that the current price of JCH stock is $100 and that the risk-free rate is 2%. In addition, a one-year European put option with strike price of $108 is trading at a price of $12. In this case what should be the price of a one-year European call option with strike price of $108. Is this different from the price you calculated in part 4a? What might explain the difference?