8. The stock of RockStar is traded at $20 now. You are holding 2,000 shares of RockStar now. The risk-free interest rate is 1.5% annually. Suppose that there is a European put option on RockStar stock that expires in one year. The exercise price of the put option is $22. One put contract calls for delivery of 100 stocks. The annual volatility of the company stock is 25%. You plan to completely hedge your stock position for next one year using the protection put strategy. [6 marks]

a) What will be the price of one put contract according to the Black-Scholes formula? [3m]

b) What is the total cost of put options for the hedging strategy? [3m]