A - Put option price: How much do you expect the put option to cost? Use the data above and the following information: the option is for 1 year, the current riskfree borrowing rate is 5% per year, the stock is expected to move up by 1.3 or down by 1/1.3 in the following year. Please round all calculations to the nearest penny or two significant digits (i.e., .03267 would become .033). Please show the equation for each step in your work.

B- If instead of holding onto the stock and buying a put (as in 1b), you could sell the stock today for $100, buy a call with an exercise price of $80, and put the leftover money in the bank. How much do you expect the call to cost? (Note: this problem is looking at an alternative method to get the payoff you drew in 1b from owning the stock and buying a put, not the payoff from 1e where you owned the stock, bought a put, and sold a call.) Please show the equation for each step in your work and use the concept of PutCall parity to solve this problem.

 

C- Why are the prices on the two options (with the same exercise price) so different?