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Discuss how you can hedge your risk to avoid a big loss

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A stock price is currently 5118. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 3% per annum with semi-annual compounding. Partl. Use the two-steps binomial tree model to price a ?-months European put option with an exercise price of $51. PartlL Assume you have sold the above put option to your client and charged him a fair price. Discuss how you can hedge your risk to avoid a big loss if the stock price turned out to be 51 in ?-months.

Reference no: EM133075471

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