A stock price is currently $50. It is known that at the end of two months...

A stock price is currently $50. It is known that at the end of two months it will be either $53 or $48. The risk-free interest rate is 10% per annum with continuous compounding. Use no arbitrage arguments. a) Whatisthevalueofatwo-monthEuropeanputoptionwithastrikepriceof$50? b) How would you hedge a short position in the option?

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b) This risk can be mitigated by using call options to hedge the risk of a runaway advance in the shorted stock.Hedging refers to buying an investment designed to reduce the risk of losses from another investment. Investors will often buy an opposite investment to do this, such as by using a put option to hedge against losses in a stock position, since a loss in the stock will be somewhat offset by a gain in the option By using this way we can hedge a short position in the option.

(note-Most of the symbols can not type in this word. So that I made a handwritten note...)

ThankYou....

jeff jeffy answered 1 year ago

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