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You would like to be holding a covered call position on the stock XYZ. The stock XYZ is currently selling for $120. Over the next

You would like to be holding a covered call position on the stock XYZ. The stock XYZ is currently selling for $120. Over the next year, the stock price will either increase by 10% or decrease by 10%. The exercise price of the call option is $125. The risk free interest rate is 3% per year.

A. What is the price of the call option? (Use a one-period binomial model)

B. What is the cost of the covered call portfolio? What will be the payoff and profit on the covered call portfolio at a stock price of $140?

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