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Question 4

The price of IBA stock is $101. It will either increase by $10.2 or decrease by $8.5 at the end of month 1. If the price is up in the first month, it will either increase by $16.1 or decrease by $21 at the end of month 2. If the price is down in the first month, it will either increase by $15 or decrease by $12.6 at the end of month 2. The risk-free interest rate is 2% per month.

1. Using the replicating portfolio approach, calculate the price of a 2-month call option with a strike price of $100.
2. What is the price of a 2-month put option with a strike price of $100?