Q1. (10 points) The Financial Institution OMEGA in the sunny State of California is implementing the latest risk HEDGING techniques. The treasurer of the institution employs a Binomial Option methodology in order to pay its obligations in the good, and the bad state of nature respectively. However, his CEO Dr. "Ding-Dong" suffered a temporary lapse of memory and he forgot how to use this risk hedging technique. Briefly explain to him what this latest technique is all about. b. Employ a call option of 9 dollars, a multiplicative upward factor of 1.4, a multiplicative downward factor of 0.8, a probability of 0.5 in every state of nature, a stock price of $90, and a striking price of $90 respectively and create a PERFECT HEDGE. The Risk-Free Rate is 5%. What is the Optimum Hedge Ratio? d. What is the intrinsic value of the option in the good and bad states respectively? Is the Call Option Overvalued or Undervalued? a. C. e. Q1. (10 points) The Financial Institution OMEGA in the sunny State of California is implementing the latest risk HEDGING techniques. The treasurer of the institution employs a Binomial Option methodology in order to pay its obligations in the good, and the bad state of nature respectively. However, his CEO Dr. "Ding-Dong" suffered a temporary lapse of memory and he forgot how to use this risk hedging technique. Briefly explain to him what this latest technique is all about. b. Employ a call option of 9 dollars, a multiplicative upward factor of 1.4, a multiplicative downward factor of 0.8, a probability of 0.5 in every state of nature, a stock price of $90, and a striking price of $90 respectively and create a PERFECT HEDGE. The Risk-Free Rate is 5%. What is the Optimum Hedge Ratio? d. What is the intrinsic value of the option in the good and bad states respectively? Is the Call Option Overvalued or Undervalued? a. C. e