Pharma RX is working on a breakthrough drug. If successful (produce a product through research and secure FDA approval), the payoff per share in 5 years be worth $1,000, or else, $100. The current price of the stock is $150. The risk-free interest rate is 5%.

A. How much would you pay for a 5-year option to buy the stock at $300/share, the exercise price? B. Sensitivity analysis: effect of a change in the exercise price, and time to maturity. Redo the problem by changing (1) the duration from 5 to 3 years. ii) exercise price from $300 to $500. Calculate separately as two items of interest. Payoffs remain the same.