Question: 8. We will derive a two-state put option value in this problem. Data: S 0 = 260; X = 270; 1 + r = 1.1.

8. We will derive a two-state put option value in this problem. Data: S0 = 260; X = 270; 1 + r = 1.1. The two possibilities for ST are 300 and 180.(LO 16-2)

a.

Show that the range of S is 120 while that of P is 90 across the two states. What is the hedge ratio of the put?

b.

Form a portfolio of three shares of stock and four puts. What is the (nonrandom) payoff to this portfolio?

c.

What is the present value of the portfolio?

d.

Given that the stock currently is selling at 260, calculate the put value.

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