The current price of a non-dividend-paying biotech stock is $140 with a volatility of

25%. The risk-free rate is 4%.

(a) What is the percentage up movement?

(b) What is the percentage down movement?

The percentage of down movement is 11.75%

(c) What is the probability of an up movement in a risk-neutral world?

(d) What is the probability of a down movement in a risk-neutral world?

Use a two-step tree to value a six-month European call option and a six-month

European put option. In both cases the strike price is $150.

Suppose that a trader sells 10,000 European call options. How many shares of the stock are needed to hedge the position for the first and second three-month period? For the second time period, consider both the case where the stock price moves up during the first period and the case where it moves down during the first period.