1. A common stock will have a price of either $75 or $25 in 2 months. A two month put option on the stock has a strike price of $30.
A. Create a riskless portfolio. Buy one put option.
B. How many shares should you buy?
2. Consider an option on a non-dividend-paying stock when the stock price is $45, the strike price is $42, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is five months. It can be shown that d1= .7576 and d2= .6285.
A. Explain how to Create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts).
B. How many shares would you buy or sell?