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Problem 2 (24 points) You would like to be holding a protective put position on the stock XYZ. The stock XYZ is currently selling for
Problem 2 (24 points) You would like to be holding a protective put position on the stock XYZ. The stock XYZ is currently selling for $120. Over the next year, the stock price will either increase by 10% or decrease by 10%. The exercise price of the put option is $125. The riskfree interest rate is 3% per year. A. What is the price of the put option? (Use a one-period binomial model) B. What is the cost of the protective put portfolio? What will be the payoff and profit of the protective put portfolio? [Hint: Use a tabular format to tabulate the payoff for S(t) X, where X is the exercise price of the put - option]
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