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The current price of a non-dividend-paying stock is $80. Over the next year it is expected...

The current price of a non-dividend-paying stock is $80. Over the next year it is expected to rise to $92 or fall to $79. Assume the risk free rate is 5%. An investor buys a put option with a strike price of $84. What is the value of the option today? How would the investor hedge the put option position? Assume that the option is written on 100 shares of stock.

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Expert Solution

Dear Reader

The question is based on the binomial model.

In second part of question (where it is asked to protect put position), name of strategy and concept of strategy is explained.

Happy Reading ✌️

Stay Safe!

jeff jeffy answered 1 year ago
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