Two-period binomial option pricing model: S = $100, q = 0.75 (the probability to go up), SU = $130, SD = $85, n = 2, X = 120, and risk-free rate = 2% per period.

(a) What is the risk-neutral probability at t = 0 and t = 1 for a put option with two periods to maturity?

(b) What are the prices of the put at t = 0 and t = 1?

(c) What are the hedge ratios of the put at t = 0 and t= 1?

(d) How do you replicate a long put payoffs at t = 0 and t = 1?

(e) How do you form a riskless hedge portfolio using the stock and the put at t = 0 and 1?