The stock price for company C is described by the binomial model. Company C's current stock price is $250, and company C does not make any dividend payments. Next year, the stock price of company C can either increase by 20% or decrease by 10%. A put option with an exercise price of $260 is traded on the stock of company

You buy some of the put options. You construct a risk-free portfolio consisting of your put options and some of the stocks on company C.

d)

i) What is the hedge ratio for the put option?

ii) Should you buy or sell stocks on company in order to obtain the risk-free portfolio?

e)

i) Describe the risk-free portfolio in detail.

ii) Calculate the put premium