Describe the delta-hedging procedure

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Reference no: EM132050033

Qusetion: Price the following European call option using the 3-level binomial tree with u = 1.2 and d = 0.9: time to expiration t = 3 months, interest rate is r = 0.06, spot price S0 = 100, strike is E = 115.

Suppose the stock moves up, then down and then up again. Describe the delta-hedging procedure you undertake, calculate cash balances at every node (assume no margins, i.e. everything is bought and sold for its fair value; if you round to cents, arithmetical errors accumulate to about 0.1.

Reference no: EM132050033

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