Consider this Put option. P= $40, X=45, D=0.80, U=1.2 Risk free Rate: 3%. T= 6months
a-) If you hold one put option today, inidicate whether you need to buy or short and how many shares of stock in order to completely hedge the risk in the long put position in next quarter i.e work for one quarter from now? (Hint: Use the binomial/ construct trees)
b-) What is today's delta with same maturity and expecise price (X) and written on the same stock as the put option from part (a) (Hint: Use put-call)
c-) How will calculate in (a) change if put is American. Dont draw trees, Just indicate.
d-) Consider long Starddle position constructed from Euro put from part (a) and european call option on XYZ Stock with same strike price and maturity. What is the annualized continously compunded expected return on the straddle over next quarter, between now and quarter from now? Assume XYZ stock has an expected continously compunded rate of 10% per year