What long position in the stock is necessary to hedge a


The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero.

I. What long position in the stock is necessary to hedge a short call option when the strike price is $32? Give the number of shares purchased as a percentage of the number of options that have been sold.

II. What is the value the call option?

III. What long position in the stock is necessary to hedge a long put option when the strike price is $32? Give the number of shares purchased as a percentage of the number of options purchased option.

IV. What is the value of the put option.

V. What is the risk neutral probability of the stock price moving up?

 

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