There are four possible states of the world tomorrow. Assume all states are equally likely. The price of three dierent stocks in each of the states are given by the table. Recall that options give you the right not the obligation to buy or sell at the exercise price.

A. Find the payo of a call option on stock 1 with a strike price of $3 in each of the four states. B. Find the payo of a put option on stock 2 with a strike price of $4 in each of the four states. C. A risk neutral investor wants to buy on option on stock 3. Should they buy a call option with strike price of $5 or a put option with a strike price of $5? Explain why.

State of the World 123 4 Stock Price 1 $6 8 $3$4 Stock Price 2S4 $3$2 $7 Stock Price 3S9 $2$6 $4