Suppose the stock now sells at $100, and the price will either increase by 20% or...

Suppose the stock now sells at $100, and the price will either increase by 20% or decrease by 20% by the end of the year. The risk-free rate from now to year-end is 5%. Which of the following options that expires at year end must have the highest price?

a) A call option with strike price of $120.

b) A put option with strike price of $90.

c) A put option with strike price of $80.

d) Not enough information

Solutions

Expert Solution

Correct answer: b) A put option with strike price of $90.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 2 years ago

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