You use the usual method in McDonald and the following information to construct a one-period binomial tree for modeling the price movements of a stock.

• The period is 3 months.
• The initial stock price is 100.
• The stocks volatility is 30%.
• The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 2%.
• The continuously compounded risk-free interest rate is 6%.

At the beginning of the period, an investor owns an American call option on the stock. The option expires at the end of the period.

Determine the largest integer-valued strike price for which an investor will exercise the call option at the beginning of the period.

1. 32

2. 33

3. 84

4. 85

5. 86

Please provide full explanation of the problem