1. Discuss the role of indifference curves and the efficient frontier in contracting the CML. Also discuss the components of the CML equation.
2. The Microsoft stock currently trades for $50 per share. Each year, there are two possible outcomes. The stock price will either increase or decrease and volatility is 20%. The risk-free rate is 5 percent and exercise price is $30. You write a European call option on IBM stock, which expires in one year. Assume that in the next year the company is not expected to pay dividends. Use binomial trees to describe the process of the stock and the European call option on the stock.