Question: We will derive a two-state put option value in this problem. Data: S0 = $110; X = $120; 1 + r = 1.10. The two

We will derive a two-state put option value in this problem. Data: S0 = $110; X = $120; 1 + r = 1.10. The two possibilities for ST are $140 and $100.

a. The range of S is $40 while that of P is $20 across the two states. What is the hedge ratio of the put?

b. Form a portfolio of two shares of stock and four puts. What is the (nonrandom) payoff to this portfolio?

c. What is the present value of the portfolio?

d. Given that the stock currently is selling at $110, calculate the put value.

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