# 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

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.

Strike Price

In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.

Strike Price

In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.

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## In order to find the hedge at the moment the option is sold we need to find the prices of the opt…View the full answer

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**ISBN:** 9788120307209

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**Authors:** Robert Thornton Morrison, Robert Neilson Boyd

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