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The current price of a non-dividend-paying stock is $37.43 and you expect the stock price to either go up by a factor of 1.209 or
The current price of a non-dividend-paying stock is $37.43 and you expect the stock price to either go up by a factor of 1.209 or down by a factor of 0.827 over the next 0.9 years.
A European put option on the stock has a strike price of $37 and expires in 0.9 years. The risk-free rate is 6% (annual, continuously compounded).
1. a. What is the option exercise value if the stock price goes down?
b. What is the risk-neutral probability of an up movement?
c. What is the value of the option?
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