The current price of stock in Company XYZ is $45 and no ex-dividend dates are to occur for the next three months. The risk-free rate is 4.00% per year.The standard deviation for the period in question is 0.4.You are a financial advisor and one of your best clients is Mr. John Thomas who is a senior-level manager at a Fortune 500 company.A portion of Mr. Thomas incentive compensation is paid in restricted stock in the company he works for which he cannot sell for a period of three years from the date of the award of the shares.Thomas has been employed at the company for 35 years and he has been in a senior position for the last 20 years.Mr. Thomas has a concentrated equity position in the company owning 1,000,000 shares.More than 80% of his wealth is in the company stock.Assume that due to contractual obligations, he cannot sell his stock over the next three months.Due to his concentrated position, he wants to hedge against the price of XYZ stock falling more than 20%.Mr. Thomas can choose to buy put options with a strike price of $36.

Price up an American call with strike price K = $105 (expiring in 4 periods) on the following stock. Each period is 3 months long:

The current stock price is $95

The standard deviation is 0.35

There will be dividends of 3.25% of the stock price whether it goes up or down in periods 1 and 3.

The risk free rate is 4.00% per year.

How will your analysis change if the standard deviation is increased to 0.50?Please illustrate both the stock price tree/lattice and the call premium tree/lattice

1. Having performed your calculations and your analysis, are there any opportunities you can identify that you can take advantage of as an investor?
2. Describe a strategy that you would like to implement and/or a portfolio that you can form that can yield attractive returns
3. Describe the benefits and risks of the strategy/ies that you would like to implement