A stock price is currently $100. Over each of the next two six-month periods, it is expected to go up by 8% or down by 8%. The risk-free interest rate is 6% per year with semi-annual compounding.

Part A

Use the two-step binomial tree model to calculate the value of a one-year European put option with an exercise price of $100.

Part B

Discuss how you can hedge risk when you initially write the put option?

Part C

Assume six months have passed, discuss how you can hedge risk when you realize that the stock price is $108?