A stock sells for $50 today. Next year there is a 10% chance the stock will sell

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A stock sells for $50 today. Next year there is a 10% chance the stock will sell for $25 and a 90% chance the stock will sell for $75. The one-year risk-free rate is 10%.

(a) What is the current price of a European put option on the stock where the option expires in one year and has an exercise or strike price of $50?

(b) What is the expected return to holding the stock for one year?

(c) What is the expected return to holding the option for one year? Is this different from the expected return to holding the stock? Why or why not?

Related Book For answer-question

Introduction To Management Science and Business Analytics A Modeling And Case Studies Approach With

ISBN: 9781260716290

7th Edition

Authors: Frederick S. Hillier, Mark S. Hillier

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Posted Date: Jun 15, 2023 12:05 AM

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A stock sells for $50 today. Next year there is a 10% chance the stock will sell

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a To calculate the current price of a European put option we can use the riskneutral probability approach The riskneutral probability is the probabili... View the full answer

Introduction To Management Science and Business Analytics A Modeling And Case Studies Approach With

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