Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go up by 15 percent or down by 20 percent in each of two binomial periods. The risk-free rate is 10 percent. (You can borrow any additional funds required at the risk-free rate, and any excess funds should be invested at the risk-free rate.)

1. At each point in the binomial tree, show the composition and value of the hedge portfolio and demonstrate that the return is the same as the risk-free rate.

2. On any revisions to the hedge portfolio, make the transactions (buying or selling) in stock and not options.