What is the expected call option price of this stock

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If there is a stock with current price of 50 SR and there are only 2 possibilities where the stock can go up to 60 SR or 40 SR within 1 year time. Assume that the free risk interest rate is 10%.

Please answer the following questions and explain each step you take:

A) What is the expected call option price of this stock?

B) How arbitrage could happen if the price of call option is 6 SR. What is the value of arbitrage?

C) How arbitrage could happen if the price of call option is 7 SR. What is the value of arbitrage?

D) What is arbitrage and how could somebody (might) achieve that? Is it easy to do arbitrage in stock market? Why?

Reference no: EM131017462

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