question archive The current stock price is $800
The current stock price is $800
Subject:FinancePrice: Bought3
The current stock price is $800. The stock price will either increase by 10% or decrease by 10% in the first month. If the price increases in the first month, it will go up by $200 or down by $150 in the second month. If the price decreases in the first month, it will go up by 10% or down by 10% in the second month. The risk-free interest rate is 4% per month. Assume there is a 2-month put option with an exercise price of $800.
a) Use the replicating portfolio approach to calculate the value of the put if stock price increases in the first month.
b) Use the risk neutral probability approach to calculate the value of the put if stock price decreases in the first month.
c) Use either approach to calculate the 2-month put premium today.
