Part 1) Answer a & b

Suppose the risk free rate is r= 2% (EAR). Also say that Facebook's current stock price is $225. Suppose that Facebook's stock at t=1 will either rise to $250 (60% chance actual probability) or fall to $200 (40% chance actual probability).

a) consider a put written on Facebook expiring in 1 year struck at K = $240. Find the change of the put.

Note: the put is a bet on down, so the change will be negative.

b) find the price of a put written on Facebook expiring in 1 year struck at K = $240

Part 2) True or false

c) for a given stock and expiration, a call with a higher strike is more valuable than a call with a lower strike.

d) suppose that the risk-free rate is zero. In this case, put-call parity says that for any strike, the price of a European put is exactly equal to the price of a European call.

e) when volatility is higher, people tend to discount cash flows more so option prices tend to go down.