Todays price of Apple (AAPL) is $200 per share. AAPL does not pay dividends. One year from today, there are two possible states. In the u state, the economy is booming and the price of AAPL is $400. In the d state, the economy is suffering and the price of AAPL is $100. The c.c. risk-free interest rate is zero percent. You are interested in a call option on AAPL with a strike of $250 and a maturity of one year. Assume there is no arbitrage.

a) How many shares of stock are in the replicating portfolio i.e., what is Delta?

b) How many bonds are in the replicating portfolio (i.e., what is Beta)?

c) What is the price of the call option?

d) Is there an arbitrage if the call price equal to $45? If so, how would you exploit it? (multiple choice)

No

Yes; long call and short replicating portfolio

Yes; short call and long replicating portfolio