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QUESTION 2 (5 points) Consider a European and an American PUT options, each on one share of Smart R Us Inc., and each with an
QUESTION 2 (5 points) Consider a European and an American PUT options, each on one share of Smart R Us Inc., and each with an exercise price of $80. The two options have one period remaining until expiration. The current price of Smart R Us is $40 and Smart R Us will not pay dividends until the expiration date. The riskless interest rate is 8.1%. By the end of the period the share price can either increase by 50% or decrease by 50%. a) Find the current price, intrinsic value and time value of the EUROPEAN PUT option. (3 points) b) What is the current price of the AMERICAN PUT option? EXPLAIN. (2 points) QUESTION 2 (5 points) Consider a European and an American PUT options, each on one share of Smart R Us Inc., and each with an exercise price of $80. The two options have one period remaining until expiration. The current price of Smart R Us is $40 and Smart R Us will not pay dividends until the expiration date. The riskless interest rate is 8.1%. By the end of the period the share price can either increase by 50% or decrease by 50%. a) Find the current price, intrinsic value and time value of the EUROPEAN PUT option. (3 points) b) What is the current price of the AMERICAN PUT option? EXPLAIN. (2 points)
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