Question #8 (15 marks) 08-Part I (6 marks) The current price of a non-dividend paying stock is $42. Over the next year it is expected to rise to $44 or fall to $39. An investor buys put options with a strike price of $43. To hedge the position, should (and by how many) the investor buy or sell the underlying share (s) for each put option purchased? (6 marks) + 08-Part II (9 marks) The current price of a non-dividend paying stock is $49. Use a two-step binomial tree to value a European call option on the stock with a strike price of $50 that expires in 6 months. Each time step covers 3 months, the risk-free rate is 5.5% per annum (continuously compounded), and the volatility is 8%. (a) Compute the up-step size (u), down-step size (d) and probability of up move (p) for the 3-month time step. (3 marks) (b) What is the value of the European call option today? (3 marks) (c) Other things remain unchanged, but if it is an American call option, what will be its value today