Question: We will derive a two-state put option value in this problem. Data: S 0 = 270; X = 300; r = 5%. The two possibilities

We will derive a two-state put option value in this problem. Data:S0= 270;X= 300;r= 5%. The two possibilities forSTare 360 and 160.

a.Find that the range ofSis _______ . Find that the range ofPis _____ across the two states. What is the hedge ratio Delta of the put?

b.Form a portfolio of -Delta shares of stock and 1 (one) put. What is the (nonrandom) payoff to this portfolio?

c.What is the present value of the portfolio?

d.Given the stock current selling price, calculate the put value.

We will derive a two-state CALL option C value in this problem. Data:S0= 270;X= 300;r= 5%. The two possibilities forSTare 360 and 160.

e.Find that the range ofSis _______ . Find that the range ofCis _____ across the two states. What is the hedge ratio Delta of the CALL?

f.Form a portfolio of -Delta shares of stock and 1 (one) CALL. What is the (nonrandom) payoff to this portfolio?

g.What is the present value of the portfolio?

h.Given the stock current selling price, calculate the CALL value.

I. Use your results from previous two problems, check whether call-put parity holds for these options.

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