Question

4. Consider six months European put option with a strike price of $100 on a stock with current price $100. There are two time steps and in each time step the stock price either moves up by 10% or moves down by 10%. Risk-free interest rate is Y-5% (on 3 months (a) Find the current option price. (b) Compute the number of shares of stock which should be held by the replicating portfolio at time 0 and 1 (after 3 months)

Answer 1

Answer to part (a)

Part (b) No. of stock would be 0.50.

i.e. Change in Put value/ Change in Share value = 0-10/110-90=0.50