Question
You are attempting to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends,
You are attempting to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $125 and a 50% chance of decreasing to $75. The risk-free rate of interest is 14%.
a. What will be the payoff to the put, Pu, if the stock goes up?
Payoff=$0
b. What will be the payoff, Pd, if the stock price falls?
Payoff = $25
c. What is the value of the put using the risk-neutral shortcut? (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Expected value= ?
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