Your Aunt Betty has a $120,000 investment portfolio comprising some Government of Canada three-month Treasury Bills and 2,000 Suncor shares. When the portfolio was formed (one month ago), the shares were worth $85,700 and the bonds were worth $34,300. Today, Suncor shares are worth $41.94 per share, while the bond yields have decreased so that the bonds are now worth $38,000. The effective yield on the three-month Canada Treasury Bill is 0.94% per annum.

Aunt Betty is a bit concerned about the drop in value of her Suncor shares and consequently, her overall portfolio value. Knowing that you are taking a finance course, she consults you to see what she can do to protect her portfolio from a further drop in value. She has heard a lot about call and put options and would like to know more about these.

You immediately go online to look for information on options on Suncor shares. You find the following pricing information on the call options (Table 1) and the put options (Table 2) on Suncor, with expiry in one month:

Table 1: Call option prices

Strike	Last	Chg	Bid	Ask	Vol	Open Int
41.50	0.43	0.01	0.42	0.45	98	96
42.00	0.33	+0.13	0.36	0.39	101	38
42.50	0.12	+0.02	0.10	0.16	62	11
43.00	0.05	0.00	0.05	0.08	2	12

Table 2: Put option prices

Strike	Last	Chg	Bid	Ask	Vol	Open Int
40.50	0.10	0.00	0.09	0.10	5	5
41.00	0.06	0.18	0.04	0.06	10	12
41.50	0.13	0.18	0.10	0.13	48	57
42.00	0.39	0.48	0.30	0.39	91	1
42.50	1.22	0.00	1.00	1.25	64	64

8) From her own intensive investigations into the operations and financial statement fundamentals of Suncor, Aunt Betty believes that in one month, the share price of Suncor will either decrease further to $40 or will increase to $45. Calculate the value of the 42-call option using the Two-period Binomial Model.

9) How does the value you have calculated in #8 (above) compare to the market-traded price of the 42-call option? What does this tell us about Aunt Bettys expectations versus the market, generally speaking?