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1. The price of a stock is $50. In three months, it will either be $47 or $52, with equal probability. (a) What is
1. The price of a stock is $50. In three months, it will either be $47 or $52, with equal probability. (a) What is the no-arbitrage price of a European put option maturing in 3 months with strike K $50? Assume for simplicity that the stock pays no dividends and the interest = rates are zero. Answer. (b) Does the no-arbitrage price of the put increase or decrease, and by how much, if the probability of the stock going up to $52 were 75% and the probability of the stock going down to $47 were 25%? Answer.
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