Piersol Paper Mill’s common stock currently sells for \($145.\) Both puts and calls on Piersol Paper are being traded. These options all expire eight months from today, and they have a strike price of \($160.\) Eight months from today, Piersol Paper common stock will sell for \($172\) with a probability of 0.5. It will sell for \($138\) with a probability of 0.5. You own a put on Piersol Paper. Now, you are becoming nervous about the risk to which you are exposed.

a. What other transactions should you make to eliminate this risk?

b. What is the expected payoff at expiration of the strategy you developed in (a)?