Answer:
The replicating portfolio today for a 6-month European put option with a strike price of $42 is 0.2044
Step-by-step explanation:
Since the strike price and maturity of the options and is was not explained, I am taking these equal to that mentioned in part (a)
Kindly find an attached image showing he two step binomial tree for valuing a 1 year European put with strike, K = $42
The first step to take is to find the replicating portfolio.
Part (a): Replicating portfolio
Thus,
we calculate the delta of the put option.
We see that as the stock price changes from $40 to $44.2068, the option price changes from $0.86 to $0.00
Thus, the delta of the put option is (0-0.86)/(44.2068-40) = - 0.2044
Therefore, replicating portfolio for the 6 month European put option with K=$42 is selling short 0.2044 shares for each contract and lending cash for 6 months at the risk free rate.