Question: QUESTION 5 [8 +2 + 3 = 13 MARKS] Consider a European put on a non-dividend paying stock with a strike of $20, maturity two

QUESTION 5 [8 +2 + 3 = 13 MARKS] Consider a European put on a non-dividend paying stock with a strike of $20, maturity two weeks, current stock price of $19, a constant risk free rate of 4% pa. continuously compounded and volatility of 25% pa. Assume a bank has just m the put option for $2.20 and wants to hedge the exposure dynamically at the end of each week. The BSM valuation for the option is $1.0466. a) Complete the following table (to 4 decimal places). For the spot and bond positions clearly label a long position as \"L\" and a short position as S' Show all workings, clearly specifying the inows (as a positive) and the outows (as a negative_) associated with the bond position. Bond position (L/S) _0pening "w b) What is the value for the cumulative hedging error? Explain what this means. c) Briey outline one of the risks associated with the hedge and how it may be managed/reduced

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