Reference no: EM133060514

Consider a put option on THE Corp's common stock. The current TrK Corp stock price is 51pm and it is Elmected to either increase by 25% or decrease by 20% each half year with equal probability. The option has a strike price of 512m, an expiration lime 13-month from now and the underlying asset of each option is one unit of THC Corp's common stock. In additional to the standard exercising right for the put buyer at maturity. this option has a special clause that gives the buyer an additional night to exercise the option 5-month from now. The risk-free interest rate is 1% per annum and the stock is not expected to pay any dividend over the next a years.

a} Use a three period binomial model to calculate the current value of the put option.

b] Show how to calculate the value of this additional right to exercise the option in 6-month without computing the value of an otherwise-equal put option with no additional right.

c} What would be the price difference between the call and put options on TrK Corp stock with a strike price of 512GB, 13-month maturity with no additional night?

d] How would the value of this additional right to exercise the put option in Ermonth change if the risk-free interest rate increases? Answer this question analytically without doing any calculation.