Question
The value of a call with a strike of $175 on APPL stock when S0 = $100, T = 3, r = 5% , u
The value of a call with a strike of $175 on APPL stock when S0 = $100,
T = 3, r = 5% ,
u = 2 or 200% (stock price doubles as we go up the tree) , and
d = 1/u= = 0.5 or 50% (stock price halves as we go down the tree)
1. Use any method to determine the premium for a put on APPL stock using the same parameters and a strike of $175.
2. Consider a structure that pays off precisely double the payoff from the put. Value this option.I suggest you think about this question before calculating because there is a simple way to answer the question using the Law of One Price.
3. Consider a structure that pays off the square of the put payoff. Value this option. Remember, the four methods work for any payoff that you write down.
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