The stock of Standard Chartered PLC is selling at Rs 500 per share and put option on this stock is available with the maturity period of one period from today. The strike price of a put is Rs 500…

The stock of Standard Chartered PLC is selling at Rs 500 per share and put option on this stock is available with the maturity period of one period from today. The strike price of a put is Rs 500 per share. It is expected that the price of stock one period from today will be either Rs 600 or Rs 400 per share. The risk free rate is 10 percent.

a. What should be the price of put today? Why do you think it is the fair price of put? b. What do you mean by hedge portfolio? Can you create the hedge portfolio using puts and stocks? c. Show that the value of hedge portfolio will be same for both stocks prices at expiry. d. What should be the rate of return of hedge portfolio? Justify. e. Suppose the put is selling for Rs 20 per share. Suggest a strategy and calculate the profit at expiry.