Question: 3. (continued) (e) In this part you will construct a hedging (replicating) portfolio for the put using holdings of futures contracts and bonds. State clearly

3. (continued) (e) In this part you will construct a hedging (replicating) portfolio for the put using holdings of futures contracts and bonds. State clearly what contracts you will need. Write at each node of the tree the holdings of futures contracts and bond required. State clearly the formulae that you use to construct the portfolio. [2 marks] (f) Verify that this portfolio does in fact replicate the put values. (It suffices to carry out the verification at just one or two nodes.) [1 mark] (g) Verify that the portfolio is self-financing. (It suffices to carry out the verification at just one or two nodes.) (2 marks) (h) Now compute the values of a corresponding American put at each node and set up a hedging portfolio. 2 marks (i) Compare and comment on the hedging portfolios for the European and American puts. [1 mark SEE OVER

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