Consider a stock on XYZ corporation, which price at date t is denoted St

. The stock price at date 0 is S0 = 100$, and the stock pays no dividends. In each period of length h = 1 day, the stock price may increase by 5% or decrease by 5%. Let Pt(K, T) denote the price at date t of a European put on XYZ with strike price K and expiration date T. Let r = 1% be the continuously compounded interest rate.

(a) (3 points) What is the price of a European Put option on XYZ, that has a strike price K = $100 and expires in 1 day ? (b) (1 point) How many shares of the stock should one buy / sell at date 0 to hedge the sale of the put ? (c) (2 points) Should the writer of the option borrow or lend at the risk-free rate to hedge his/her position ? How much ?