You are considering the sale of a 1-year Call option with X=100. The stock price is now S0=100. The stock pays no dividends and the price goes up to $120 with probability 0.5 and down to 80 with probability 0.5. r=10 percent.

a)Calculate the price of this call option.

(b) Consider an increase of the volatility. Assume that you know that actually the price goes up to $130 with probability 0.5 and down to 70 with probability 0.5. What is the fair price of this option?

(c) How can you make an arbitrage profit & how much is the profit of your strategy?