a. The hedge ratio of the call = (Change in the option price) / (Change in the stock price) = (C2 - C1) / (S2 - S1) = ($20 - $-20) / ($190 - $110) = 0.8.
b. Using the hedge ratio computed in part (a), the value of a call option on the stock with an exercise price of $170 can be calculated in both states. In the high state, the stock price is $190 and the call option would be exercised for a payoff of $20. In the low state, the stock price is $110 and the call option would not be exercised, giving a payoff of $0. Then, the expected call payoff is:
(0.5 × $20) + (0.5 × $0) = $10
The present value of the expected payoff using the effective interest rate is:
$10 / (1 + 1.1) = $4.54
Therefore, the value of the call option is $4.54.