Putz Industries common stock currently sells for $100 a share. We expect the stock to either double or halve each year over the next two years (i.e., the continuously compounded volatility per year is sigma= 0.6931). The rate of return on riskless securities is 5% per year continuously compounded. The firm just announced issuance of two-year European put options with an exercise price of $120.

a. Price Putzs puts.

b. If this were an American option, under what circumstances might it be optimal to exercise the option prior to expiry.