Question: Consider a 3-month put option. Suppose that the underlying stock price is $16, the strike $15.5, the interest rate is 10% p.a., stock volatility is

Consider a 3-month put option. Suppose that the underlying stock price is $16, the strike $15.5, the interest rate is 10% p.a., stock volatility is 5% per month.

a)What is the level of annual volatility?

b)Define implied volatility. Explain how you would compute implied volatility (no need to compute).

c)Assume that:

dt = 0.0833

u = 1.0513

a = 1.0084

p = 0.5711

What is the probability of stock price going down?

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