Question: 26 Consider the March 2010 5 put option on JetBlue

26. Consider the March 2010 $5 put option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per year.
a. What is the put option’s leverage ratio?
b. What is the beta of the put option?
c. If the expected risk premium of the market is 6%, what is the expected return of the put option based on the CAPM?
d. Given its expected return, why would an investor buy a put option?

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