Suppose that a stock is currently trading at $60 per share, and the stock price can only take two possible values one year from now: it can either go up by 25% or down by 20%. The annual risk-free rate is 4%. Assume that the stock pays no dividends. You are interested in pricing an European put option on this stock. The option has a strike price of $66, and its maturity date is exactly one year from now. 

a) What is the payoff on the put option if the stock price goes up by 25%? 

b) What is the payoff on the put option if the stock price goes down by 20%? 

c) What is the price of the put option?

Answer rating: 100% (QA)

a If the stock price goes up by 25 the stock price will be 75 The put option has a strike price of 6... View the full answer