A power option pays off [max(ST X),0]2 at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What position in the stock is necessary to hedge a short position in one power option? Question 27 options: Long 1.333 shares Short 1.333 shares Long 2.5 shares Short 2.5 shares

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