You are trying to value an option on DMH (Ducati). The stock price is currently $70....

You are trying to value an option on DMH (Ducati). The stock price is currently $70. Next year the stock price will either increase or decrease by $10. The following year the stock price will either increase or decrease (from the year 1 value) by $5. One-year U.S. treasuries currently have an annual return of 4%. Assume that at a one-year U.S. treasury bought in year 1 (maturing in year 2) will have a one-year return of 5%. a. What is the value on a two-year European put option with a strike price of $78? b. What is the value of a two-year American put option with a strike price of $78 (assume you can only exercise at year 1 or year 2, not today)?

Expert Solution

a. Value of two years EUROPEAN put option is $5.12

b. Value of two years AMERICAN put option is $6.41

jeff jeffy answered 5 months ago

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