Eagleton\'s current stock price is $10. Suppose that over the current year, the

Question

Eagleton's current stock price is $10. Suppose that over the current year, the stock price will either increase by 97% or decrease by 60%. 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 $19.701? c. Suppose the put options in parts (a) and (b) could either be exercised immediately, or in one year. What would their values be in this case? a. What is the value today of a one-year at-the-money European put option on Eagletron stock? The value today of the one-year at-the-money European put option on Eagletron stock is s(Round to the nearest cent.)

Explanation / Answer

u=1.97

d=0.4

p=(e^(25%*1)-0.4)/(1.97-0.4)=0.563074

1-p=0.436926

Value of one year ATM put=e^(-25%*1)*(0.563074*max(10-1.97*10,0)+0.436926*max(10-0.4*10,0))=2.04167

Value of 19.7 strike put=e^(-25%*1)*(0.563074*max(19.7-1.97*10,0)+0.436926*max(19.7-0.4*10,0))=5.342369

Value of ATM put now if exercised=0..Hence, it would not be exercised now..Its value would be 2.041637

Value of one year 19.7 strike put if exercised now=19.7-10=9.7..hence, it is better to exercise it now..Its value would be 9.7

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