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Consider a European call option on a non-dividend-paying stock where the stock price is $40, the
strike price is $40, and the time to its maturity is 6 months. Assume that the volatility of the
underlying stock is 30% per year and the risk-free rate is 4%.
a. (10 marks) Value the option using a two-step tree. Also, you need to present a hedging strategy
for the option writer.
b. (10 marks) Repeat part a if the option is American style.
a)
b)
i have already done the two-step tree parts, just want to know what to do the hedging strategy part. suz 53.99 435 $13.99435 Su Sud 40 Aſ 40 5146.473377 $6.871376 sd 34.42832 80 $3.373919 S02 F129.63273 $0 B , 473 371 7| 3. 44 75 1 542 Ci3, 44435 Sud А ГИ0 / 3.3734 (4 34. 42 332 24. (3273 ) 273 гг

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