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Calculate the price of a 3-month put option

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The price of IDO stock is currently $80. In the first quarter, the price either increases 30% or decreases 25%. In the second quarter, the price either rises by $20 or falls by $20 if price increases in the first quarter and rises by $25 or falls by $25 if price decreases in the first quarter. The risk-free interest rate is 4% per quarter.

a) Using the replication portfolio approach, calculate the price of a 3-month put option that has an exercise price of $80.

b) Using the risk neutral probability approach, calculate the price of a 6-month call option that has an exercise price of $75.

Reference no: EM133004363

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