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Consider a 1-year European call option on 100 shares of SPY with a strike price of $290 per share. The price today of one share
Consider a 1-year European call option on 100 shares of SPY with a strike price of $290 per share. The price today of one share of SPY is $285. Assume that the annual riskless rate of interest is 3%, and that the annual dividend yield on SPY is 1%. Both rates are continuously compounded. Finally, SPY annual price volatility is 25%. In answering the questions below use a binomial tree with two steps. a) Compute u, d, as well as p for the binomial model. b) Value the option today using the binomial tree. c) How would you hedge today a long position in this option
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