Question: Problem 2 A stock process starts at time 0 at 100 and then can go 40 up or 20 down for each time step. We

Problem 2 A stock process starts at time 0 at 100 and then can go 40 up or 20 down for each time step. We consider two time steps, the risk-free interest rate is zero. Consider a European call option with strike price of $150. 1. Sketch the Stock process. 2. Find the option value at all nodes of the tree. 3. Assume that the stock first goes up. Find the appropriate hedging strategy for this case and compute your stock and bond holdings. Explain in detail how you are hedged for the next time-tick, independent of what is going to happen next. Problem 2 A stock process starts at time 0 at 100 and then can go 40 up or 20 down for each time step. We consider two time steps, the risk-free interest rate is zero. Consider a European call option with strike price of $150. 1. Sketch the Stock process. 2. Find the option value at all nodes of the tree. 3. Assume that the stock first goes up. Find the appropriate hedging strategy for this case and compute your stock and bond holdings. Explain in detail how you are hedged for the next time-tick, independent of what is going to happen next

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