Question: 1. We will derive a two-state put option value in this problem. Data: ; (i.e. r=10%). T=1 year. The two possibilities for are 130 and

1. We will derive a two-state put option value in this problem. Data: ; (i.e. r=10%). T=1 year. The two possibilities for are 130 and 80.

a. Show that the range of is 50 while that of put option is 30 across the two states. What is the hedge ratio of the put?

b. Form a portfolio by shorting three shares of stock and writing five puts. What is the (nonrandom) pay-off to this portfolio? What is the present value of the portfolio?

c. Given that the stock currently is selling at 100, show that the value of the put must be 10.91.

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