Question 4 [26 marks]. The price S(t) of a share follows the GBM with parameters S=40,=0.02,=0.18. the continuously compounded interest rate is r=6% Consider the option whose expiration time T is 15 months and whose payoff function is R(S(T))={350ifS(T)35ifS(T)>35 (a) Compute the no-arbitrage price of this option. (b) What is the probability that this option will be exercised? (c) If you are the seller of this option, what should be your hedging strategy? Namely, how many shares must be in your portfolio and how much money should be deposited in the bank at any time t,0tT, in order for you to be able to meet your obligation at time T ? (d) In one year the price of the share has dropped by 2. How many shares should be in your hedging portfolio and how much money should be deposited in the bank? Question 4 [26 marks]. The price S(t) of a share follows the GBM with parameters S=40,=0.02,=0.18. the continuously compounded interest rate is r=6% Consider the option whose expiration time T is 15 months and whose payoff function is R(S(T))={350ifS(T)35ifS(T)>35 (a) Compute the no-arbitrage price of this option. (b) What is the probability that this option will be exercised? (c) If you are the seller of this option, what should be your hedging strategy? Namely, how many shares must be in your portfolio and how much money should be deposited in the bank at any time t,0tT, in order for you to be able to meet your obligation at time T ? (d) In one year the price of the share has dropped by 2. How many shares should be in your hedging portfolio and how much money should be deposited in the bank