The stock price of ABC changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is 40. The interest rate is 12.7% per year, or about 1% per month.

Required:

a) Suppose a one-month call option on this stock has an exercise price of 40, what is the option delta?

b) Show how the payoffs of this call option can be replicated by buying ABCs stock and borrowing.

c) Using the risk-neutral method to calculate the value of a one-month call option with an exercise price of 40.

d) Construct a two-month binomial tree. What is the value of a two-month call option with an exercise price of 40?

e) Use put-call parity, what is the price for a one-month put with the same exercise price? And a two-month put with the same exercise price?