Suppose the price of a share XYZ is 100 at t=0. At t=1, the share-price either increases to 108 or decreases to 88. At t=2, the share-price will either be 120 (if the share goes up twice), or 96 (if the share goes up at t=1 and goes down at t=2 and if it goes down at t=1 and goes up at t=2) or it will be 80 (if the share prices goes down twice). The risk- free interest rate is 2.5%.

Suppose that at t=0 you could buy a put option on XYZ with strike price 100 and exercise-date t=2.

[a] How much -if anything- are you willing to pay at t=0 for this put option?

The theoretical price of the put option could be determined using the Binomial Option Price Model (BOPM).

[b] What is the theoretical price (at t=0) of the put option according to the BOPM?

[c] What according to the Put-call Parity- would be the price of a call option (on XYZ) at t=0 with a strike price of 100 and exercise-date t=2?