Question: Using the binomial option pricing model: Eagletron's current stock price is $10. Suppose that over the current year, the stock price will either increase by

Using the binomial option pricing model:

Eagletron's current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR).

a) What is the value today of a one-year at-the-money European put option on Eagletron stock?

b) What is the value today of a one-year European put option on Eagletron stock with a strike price of $20?

c) Suppose the put options in parts (a) and (b) could be exercised either immediately or in one year. What would their values be in this case?

Answer using the binomial pricing model:

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