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QUESTION

Hi! Can you help me?

Hi! Can you help me?

Stock has a current price of $60. Each month the price rises by 10% or falls by 5%, with equal probability. The monthly risk-free rate is 1%.

a) Find the current price of a European put option on the stock with two months until expiration and exercise price of $65.

b) Consider an option trader who has sold a call option on the stock with exercise price of $58 and two months until expiration. How many shares of stock must he hold at time zero to hedge his option position?

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