A non-dividend paying stock currently trades for $25 and has an annualised return standard deviation of 15%. Given that the continuously compounded risk-free rate of return is 4% p.a., complete the following: a. Using a two-step binomial tree, price the American put option on the stock when the put has an exercise price of $26 and 6 months to maturity. (4 marks) b. I have just sold 500 European call options written over shares in ABC Bank. The stock is currently trading for $40 a share and has a return standard deviation of 20% p.a. The options mature in 2 months and have a strike price of $40. The continuously compounded risk-free rate of return is 5% p.a. Explain exactly how I can trade today in the underlying shares to hedge my market risk. How often should I rebalance my portfolio? (4 marks) c. Discuss how an increase in an options strike price would affect its delta if it was a call or a put, holding all other variables constant. (2 marks) d. Explain the concept of implied volatility and how it can be a useful measure of market expectations. (3 marks) A non-dividend paying stock currently trades for $25 and has an annualised return standard deviation of 15%. Given that the continuously compounded risk-free rate of return is 4% p.a., complete the following: a. Using a two-step binomial tree, price the American put option on the stock when the put has an exercise price of $26 and 6 months to maturity. (4 marks) b. I have just sold 500 European call options written over shares in ABC Bank. The stock is currently trading for $40 a share and has a return standard deviation of 20% p.a. The options mature in 2 months and have a strike price of $40. The continuously compounded risk-free rate of return is 5% p.a. Explain exactly how I can trade today in the underlying shares to hedge my market risk. How often should I rebalance my portfolio? (4 marks) c. Discuss how an increase in an options strike price would affect its delta if it was a call or a put, holding all other variables constant. (2 marks) d. Explain the concept of implied volatility and how it can be a useful measure of market expectations