TASK 2 a)

Assume that the price of a stock today is 100. The next period it goes either up to 112 or down to 95 with equal probability. Assume that the risk-free interest rate is 6 percent. What is the value of an option to buy the stock at a price of 100 in the next period?

b)

Briefly explain which method you used to find the right price for the option and why that method gives the right price.