Question
Suppose a stock is currently selling for $90 per share. If the stock gains value, it will gain 20% over the next year. If the
Suppose a stock is currently selling for $90 per share. If the stock gains value, it will gain 20% over the next year. If the stock loses value, it will lose 20% over the next year. Assume the risk-free rate of interest to be 3%. What is the theoretical value of a one-year PUT option with a strike price of $85, using the binomial model of option pricing?
A) Show the put value utilizing the replicating portfolio method, and explaining your positions in the replicating portfolio.
B) Show the put value utilizing the probability and expected payoff method.
C) Repeat parts A & B above, using a put option strike price of $80.00.
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