Option Pricing in Discounted Cash Flow

Consider a 2-year European put with strike price $100. The current stock price is $100 and the stock price can move either up or down by 20% once during the life of the option. The risk-free interest rate is 5% per annum.

This time, we want to use the DCF approach to determine the option price. Risk-averse investors require the return on stock to be 7% per annum.

(a)What is the real probability p^* of an increase in the stock price?

(b)What is the discount rate for the put option in DCF? Find the annual rate r_put in continuous compounding.

(c)What is the current price of the put from DCF?