Question
Harbin Manufacturing has 10 million shares outstanding with a current share price of $ 20.41 per share. In one year, the share price is equally
Harbin Manufacturing has 10 million shares outstanding with a current share price of $ 20.41 per share. In one year, the share price is equally likely to be $ 28 or $ 20. The risk-free interest rate is 5 %. a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike price of $ 25? b. What is the expected return of the call option? c. Using the risk-neutral probabilities, what is the value of a one-year put option on Harbin stock with a strike price of $ 25? d. What is the expected return of the put option?
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