In: Finance
You are trying to evaluate an exotic two-year European option on TSLA. TSLA shares are currently trading at $200. Next year, TSLA shares will either increase by either 10% or decrease by 5%. In the following year, TSLA will either increase by 5% or decrease by 10% from the stock price at year 1. The risk-free rate is 5% per year. However, this isn’t a normal call option or put option. Instead, the option rewards you if the stock price doesn’t move very much in either direction. Specifically, if you exercise the option you will get: $25 – (|stock price - $210|) (as a refresher, the “|” symbol means the absolute value). What is the value of the option if it expires in 2 years, and is a European style option?