Suppose the share price of a certain stock is €22 today and that it will either be €26 or €16 in six months and will move after another six months as follows: if at €26, to either €40 or €23 and, if at €16, to either €23 or €11. If the interest rate is 8% compounded continously and no commission is charged on options, describe a portfolio consisting of shares and bonds which hedge the risk on a call option on one share with strike price €25 and maturity date one year.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.