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Suppose stock price S=50, put option price P= $2.00 for 6 mo maturity and exercise...

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Accounting

Suppose stock price S=50, put option price P= $2.00 for 6 mo maturity and exercise price E=$50. You buy 200 shares now. You believe there is a 50% chance the stock price will increase to $60 and 50% chance it will decline to $40 in the next 6 months. How can you hedge against a decline in stock price by using options? Calculate the potential benefit or loss from hedging. What is the benefit/loss if the probabilities are 70% for increase and 30% for decrease.

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