Use a two period binomial model on a stock

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Reference no: EM131325468

Use the information in problem 9 to set up a dynamic hedge using stock index futures. Assume a multiplier of 500. The futures price is 496.29. The volatility is 17.5 percent. The continuously compounded risk-free rate is 3.6 percent, and the call delta is 0.3826.

Let the stock price increase by $1, and show that the change in the portfolio value is almost the same as it would have been had a put been used.

For the next three problems, use a two-period binomial model on a stock worth 100 that can go up 20 percent or down 15 percent. The risk-free rate is 6 percent each period.

Reference no: EM131325468

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