TMS is currently trading at $50 per share. An executive at TMS has told you that if the companys recently introduced new products are well received the stock will increase to $60 and if they are not well received the stock price will drop to $42 in 6 months. The current six-month interest rate is 6%. You wish to calculate C (50, .5, 50) using BOPM.

a) Find u and d (u is the percentage the stock goes up each period and d is the percentage the stock goes down each period)

b) Find Cu and Cd

c) Calculate C (50, .5, 50)

d) Find the hedge ratio

e) Describe a risk-free portfolio that can be composed using the hedge ratio

f) Show that the portfolio is in fact risk-free

g) If the actual market price of this option was $4, what strategy would you employ and what would be your rate of return?

h) Repeat part g if the market price of the option was $7