Q4

You have been asked by a client to determine the maximum price he should be willing to pay to purchase a European Put option on FDY Corporation's stock. The option has an exercise price of $25, and it expires in 2 years. The current price of FDY Corporation's stock is $25, and the annual risk-free rate is 7 percent. It is expected that FDY Corporation will pay $2 as dividend at the end of first year. The price is expected to go up or down once a year. If the price goes up, it will go up by 10 percent and if it does down, it will go down by 5 percent. What is the maximum price your client should pay? Using risk- neutral approach. T