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Consider a one year American put option on 100 ounces of gold with a strike of...

Consider a one year American put option on 100 ounces of gold with a strike of $2300 per ounce. The spot price per ounce of gold is $2300 and the annual financing rate is 7% on a continuously compounded basis. Finally, gold annual volatility is 15%. In answering the questions below use a binomial tree with two steps.

A. Value the option at time 0 using the binomial tree.

B. How would you hedge a long position in the put option at time 0 with a portfolio composed of a position in gold, and a cash borrowing or lending position?

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