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.

b. I have just sold 700 European call options written over shares in XYZ Bank. The stock is currently trading for $24 a share and has a return standard deviation of 20% p.a. The options mature in 2 months and have a strike price of $24. The continuously compounded risk-free rate of return is 4% 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?