Question: We will derive a two-state put option value in this problem. Data: S 0 = $100; X = $110; 1 + r = 1.10. The

We will derive a two-state put option value in this problem. Data: S₀ = $100; X = $110; 1 + r = 1.10. The two possibilities for S_T are $130 and $80.

Required:

a. The range of S is $50 while that of P is $30 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.)

c. What is the present value of the portfolio? (Round your answer to 2 decimal places.)

d. Given that the stock currently is selling at $100, calculate the put value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

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