Question
A stock selling for $25 today will, in 1 year, be worth either $35 (up by 40%) or $20 (down by 20%). The risk-free interest
A stock selling for $25 today will, in 1 year, be worth either $35 (up by 40%) or $20 (down by 20%). The risk-free interest rate is 8%. This stock does not pay dividends. There is a 1-year European call option on the stock with exercise price $30. What is the value of the call option today? Please use one-period binomial model and assume discrete discounting. (2 points)
Suppose there is also a 1-year European put option on the same stock as in Question 1 with exercise price $30. What is the value of the put option today? Please use one binomial tree model and assume discrete discounting. (2 points)
Show that put-call parity holds based on your results from Q1 and Q2.
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