Question: Future prices of a stock are modeled with a one-period binomial tree, the period being one year.
You are given:
(i) the stocks current price is 42
(ii)the continuously risk-free interest rate is 5%
(iii) the stock pays continuous dividend at a rate of 10%
(iv) sigma = 0.3
A European call option expiring in one year on the stock has strike price 40.
Determine
(a) the number of shares purchased/sold and the amount of money borrow/lent in the replicating portfolio for the call option;
(b) the premium of the call option