Answer Happy

Q4. In a binomial tree model shown in figure 1 and 2 below, given that the price of the option at time zero is 15. a) Trace through the hedge, using the formula that, at any current time, we should hedge fup - fdown Sup – 8 down units of stock 60 60 40 time: 0 time: 1 time: 2 time: 3 time: 0 time: 1 time: 2 time: 3 Figure 1 The option claims and claim-values at time 24 60 40 20 10 time: 0 time: 1 time: 2 time: 3 Figure 2 The option claim treet b) Suppose the stock now goes up to 120 c) Suppose the stock goes up again to 140- d) Finally suppose the stock goes down to 1204