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Suppose that Bigco is currently trading for $100 per share. We know that in one year Bigco stock will sell for either $150 per share
Suppose that Bigco is currently trading for $100 per share. We know that in one year Bigco stock will sell for either $150 per share ("good day") or for $75 per share ("bad day"). No other prices are possible, and the stock does not pay any
dividends. The riskless interest rate is 3 percent, so a bond worth B, next year sells for Bo = By/(1 + r) today. Stocks, bonds,
and options can all be bought or sold, long and short, without any transaction costs.
- What is the value of a European PUT option with a strike price of $100 and expiration in one year?
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