With the following information:

Spot price	50
Strike price	50
Effective annual risk-free rate	1%
Continuous Dividend yield	0
Time to maturity	1 year
u	1.2
d	0.8

Construct a 1-step binomial tree for a European call option.

(a) What is S_u for the European call option?

(b) What is S_d for the European call option?

(c) What is C_u for the European call option?

(d) What is Cd for the European call option?

(e) What is for the European call option?

(f) What is B for the European call option? (Leave 2 d.p. for the answer)

(g) What is the premium for the European call option? (Leave 2 d.p. for the answer)

(h) What is the premium for the European put option? (Leave 2 d.p. for the answer)

(i) Suppose you observe a call price of $5.50. How can you arbitrage?

a. Long call, long stock and borrow money.

b. Short call, long stock and borrow money.

c. Long call, short stock and lend money.

d. Short call, short stock and lend money.

(j) What is the present value of the arbitrage profit? (Leave 2 d.p. for the answer)

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