Question: Rob wishes to buy a European put option on BioLabs

Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend–paying common stock, with a strike price of $40 and six months until expiration. BioLabs’ common stock is currently selling for $30 per share, and Rob expects that the stock price will either rise to $60 or fall to $15 in six months. Rob can borrow and lend at the risk-free EAR of 5 percent.
a. What should the put option sell for today?
b. If no options currently trade on the stock, is there a way to create a synthetic put option with identical payoffs to the put option just described? If there is, how would you do it?
c. How much does the synthetic put option cost? Is this greater than, less than, or equal to what the actual put option costs? Does this make sense?

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  • CreatedAugust 28, 2014
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