Problem 21-53

You are attempting to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $125 and a 50% chance of decreasing to $75. The risk-free rate of interest is 14%. a. What will be the payoff to the put, P_u, if the stock goes up?

b. What will be the payoff, P_d, if the stock price falls?

c. What is the weighted average value of the pay off? (Do not round intermediate calculations. Round your answer to 3 decimal places.)