You are thinking of buying a European put option on shares in a company called ABC....

       
 

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You are thinking of buying a European put option on shares in a company called ABC. The current price of one ABC share is S30, and over the next month the share price will either increase to $37.5 or decrease to $28.8. The European put option will expire at the end of one month. The strike price is $31.5. The share will not pay any dividends during the next month. You can borrow money today for one month at the rate of ji2 = 5.8% p.a. a. [6 marks] Consider the replicating portfolio (i.e., the investment strat- egy which will give identical payoffs, at the end of one month, to the put option), that involves buying h shares in ABC today, and borrowing SB for one month. Find the values of h and B. (Round your answers to five decimal places.). Illustrate this model in a carefully labelled contingent cash flow diagram. b. [1 mark] What is the initial cost (i.e., net outlay) today of investing in the replicating portfolio? (Round your answer to five decimal places.) You are thinking of buying a European put option on shares in a company called ABC. The current price of one ABC share is S30, and over the next month the share price will either increase to $37.5 or decrease to $28.8. The European put option will expire at the end of one month. The strike price is $31.5. The share will not pay any dividends during the next month. You can borrow money today for one month at the rate of ji2 = 5.8% p.a. a. [6 marks] Consider the replicating portfolio (i.e., the investment strat- egy which will give identical payoffs, at the end of one month, to the put option), that involves buying h shares in ABC today, and borrowing SB for one month. Find the values of h and B. (Round your answers to five decimal places.). Illustrate this model in a carefully labelled contingent cash flow diagram. b. [1 mark] What is the initial cost (i.e., net outlay) today of investing in the replicating portfolio? (Round your answer to five decimal places.)

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1 In upstate Payoff of put000 Replicating portfolios payoffh375B15812 Hence h375B1581... View the full answer