Consider a binomial model with a stock with starting price of $100 Each period the stock can go up 5 or drop 3 An investment bank sells for $0 80 a European call option on the stock that matures after five periods and has a strike price of $120 Interest rate per period is 2 Describe the steps to be taken by the investment bank in order to start hedging this short position at the moment the option is sold

Question: Consider a binomial model with a stock with starting price of $100. Each period the stock can go up 5% or drop 3%. An investment

Consider a binomial model with a stock with starting price of $100. Each period the stock can go up 5% or drop 3%. An investment bank sells for $0.80 a European call option on the stock that matures after five periods and has a of $120. Interest rate per period is 2%. Describe the steps to be taken by the investment bank in order to start hedging this short position at the moment the option is sold.

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