6.2. A stock is now at $60. In a year its price will either be $75...

 

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6.2. A stock is now at $60. In a year its price will either be $75 or $45. (a) Assuming that the interest rate is r = 0.05 find the price of a put (60 - S₁-)+. (b) How much stock Ao do we need to sell to replicate the option. (c) Verify that having Vo in cash and Ao in stock replicates the option exactly. 0 6.2. A stock is now at $60. In a year its price will either be $75 or $45. (a) Assuming that the interest rate is r = 0.05 find the price of a put (60 - S₁-)+. (b) How much stock Ao do we need to sell to replicate the option. (c) Verify that having Vo in cash and Ao in stock replicates the option exactly. 0

Answer rating: 100% (QA)

To replicate the option we need to create a portfolio with the same payoffs as the put option The put option pays off as follows a If the stock price ... View the full answer