Consider a one-period binomial world in which the current stock price of 60 can either go up by 20 percent or down by 16 percent. There is a European put option on this stock with an exercise price of 60 expiring at the end of first period. The risk-free rate is 7 percent.

a.Calculate the risk neutral probabilities of stock price going up and down. What is the theoretical value of the put at time 0, i.e., today?

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