4. (10 points) Suppose we know for certain that a stock with a price of...
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4. (10 points) Suppose we know for certain that a stock with a price of $20 will either increase by 5% or decrease by 5% in the next period and the exercise price of the option on this stock is $20 after one period. a) Display the payoff of call option and put option with binomial tree. b) Determine the amount of stocks and bonds needed to replicated the payoff of call option and put option. (Assume the interest rate of bond is 3%). c) Calculate the value of call option and put option in terms of the value of stocks and bonds which you have calculated in item b), d) If the call option and put option values are $0.9 and $0.3, respectively, then how much the arbitrage profits will be
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